Ch. 6: Security Offerings 275
Of course accurate determination of the timing of an offering is critical to measure
its price reactions, andBrown and Warner (1985)estimate the attenuation effect on
measured market price reactions from inaccurate announcement dates. Another problem
is thatLease, Masulis, and Page (1991)found a substantial proportion of SEOs are
sold after the close of trading, rather than before the open, which is the more common
occurrence. They used the Dow Jones time stamps to determine the actual time of day
when the SEO is sold.Safieddine and Wilhelm (1996)use abnormal trading volume to
determine the time of day when the SEO is sold and argue that this is more accurate
approach. They also report a significant number of offers occurring after the market
close.
A number of studies have investigated whether SEO underpricing is evidence of price
pressure or a downward sloping demand curve. These studies include:Kadlec, Loderer,
and Sheehan (1994), Corwin (2003), Meidan (2004)andAltinkilic and Hansen (2006).
They report mixed results as to whether there is a downward sloping demand curve
effect, short lived price pressure effect or adverse information effect similar to the ob-
served effect of block trades. Kadlec, Loderer and Sheehan reports that in the months
immediately surrounding an SEO there is evidence of a temporary stock price decline.
Corwin (2003)finds SEO underpricing is positively related to relative offer size and
interprets this as support for a price pressure effect.Meidan (2004)reports significant
negative returns immediately before an SEO and significant positive returns immedi-
ately afterwards, which supports a price pressure effect.Altinkilic and Hansen (2003)
report an unusually large negative mean return of− 2 .6 percent over the week prior to
an SEO, followed by a small positive return in the week following the SEO, which is
inconsistent with simple price pressure effect.
Table 8provides a detailed summary of the empirical evidence from prior empirical
studies on the determinants of underpricing of IPOs and SEOs. In light of the large
number of explanatory variables studied,Table 9provides a summary of these for easy
reference. For the most part, the studies in this area report qualitatively consistent re-
sults for their effects on underpricing. Underpricing is found to be significantly related
to (1) firm characteristics such firm size, financial condition, industry and share owner-
ship structure, (2) security characteristics such as exchange listing, listed stock options,
security volatility and market microstructure properties, and (3) offering characteristics
such as offer size, offer price, underwriting syndicate, capital market conditions, other
flotation costs and the likelihood of offer withdrawal.
Interestingly, venture capital backing, underwriter rank, and lead underwriter not in
the top 25 are all often found to be significant, but with differing signs across the studies.
This could reflect the endogeneity associated with the later two variables and under-
pricing. The varying sign of venture capital backing on underpricing is consistent with
Habib and Ljungqvist (2001)who argue that the incentive to avoid underpricing an IPO
will vary with the relative size of the primary and secondary shares that are offered.
Thus, from this perspective it is important to model not only an indicator for venture
backing, but also the size of venture shareholdings and whether these shares are being
sold.