Ch. 6: Security Offerings 279
Ta b l e 8
(Continued)Study Sample period Explanatory variable Sign
Inverse of stock price +
Stock return standard deviation +
Offer size −
Cumulative market return (from filing) −
Cumulative abnormal stock return −
Underwriter rank −
Kim and Shin (2004) 1983–1998 Stk ret standard deviation (prior year) +
Rule 10b-21 in force +
Underwriter spread +
Underwriter rank −
Mola and Loughran (2004) 1986–1999 Nasdaq listing +
Technology firm +
Underwriter spread +
Underwriter has top tier analyst +
Offer price is an integer +
Utility industry −
Log(closing price on day−1) −
Prior SEO −
Underwriter rank −
Kim, Palia, and Saunders (2005a) 1970–2000 Underwriter spread estimate +
Commercial bank undrwrtrs allowed +
Cumulative mkt. ret. (prior 15 days) +
Inverse log(issue size) +
Market cap∗Inverse log(issue size) −
Underwriter rank (market share) −
Lead underwriter not in top 25 −
3.4. Dependence between underpricing and underwriter spreads
Mola and Loughran (2004)finds a significantly positive relationship for SEOs between
underpricing and underwriter spreads. However, they do not fully control for the poten-
tial joint determination of these two costs.Kim, Palia, and Saunders (2005a)examines
the relationship between underpricing and underwriter spreads. They find that in both
SEOs and IPOs there is a positive relation between underwriter spreads and underpric-
ing, though in the case of IPOs the relationship is driven by low quality issuers. They
argue that these two flotation cost components can both be viewed as forms of under-
writer compensation, which can be one explanation for their positive correlation. This
evidence is consistent withSmith (1986), Hansen (1986)andChen and Ritter (2000)
who argue that underwriters and issuers jointly determining the direct and indirect costs
of issuance.^16
(^16) Yeoman (2001)develops a model of net proceeds maximization where underwriter spreads and underpric-
ing are interrelated. However, the predicted relationship is negative in his model.