288 B.E. Eckbo et al.
Other direct flotation expenses. The analysis of the other expenses such as registra-
tion and listing fees, legal and accounting and printing expenses is fairly limited.Smith
(1977)finds for firm commitment SEOs that other direct expenses average about 1.15
percent of the offer price. He also examines the determinants of these other direct ex-
penses and finds them to be functions of flotation method and offer size, measured by
gross proceeds. His evidence documented a strong economy of scale effect in direct
total flotation costs, with the smallest offerings having total direct costs ranging from
14 to 15 percent and the largest offerings having a total cost of less than 4 percent.
Altinkilic and Hansen (2000)argue that a large fraction of these fees (85 percent) are a
variable cost. There is little added information on other expenses.
Eckbo and Masulis (1992)estimate the determinants of direct flotation costs (sum of
underwriting fees and other expenses). They find that on average direct flotation costs
average over 6 percent for industrial issues and 4.25 percent for utility issues. They
also report that they have a non-linear relationship to size (−), percentage change in
outstanding shares (+for industrials), log of holdings per shareholder (−), prior stock
return standard deviation (+) and an indicator of underwritten firm commitments and
standby offers (+).
Habib and Ljungqvist (2001)analyze the relationship of out-of-pocket expenses plus
underwriting fees (which they term “promotion costs”) and underpricing. They develop
a model that assumes that the issuer makes decisions to minimize the wealth loss of
going public, which includes the cost of underpricing and the promotion costs. They
predict that promotion costs increase with the portion of the IPO that represents in-
sider selling (size of secondary offer), the relative offer size and uncertainty. In testing
their model they take account the endogeneity of underpricing, promotion costs and
underwriter rank. They find that promotion costs are positively related to the estimated
relative offer size, estimated proportion of insider sales and several risk proxies, namely
underwriting fees and the log of sales while they are negatively related to gross proceeds
and firm age. These results support the predictions of their model.
Other flotation costs of rights. Rights offerings are generally used only in SEOs.
As noted earlier, a rights offer involves issuing short lived in-the-money warrants to
existing shareholders on a pro-rata basis. This issue method differs substantially from
a firm commitment method and has several potentially large indirect issue costs, which
are borne by the issuer and its shareholders.^18
(1)Capital gains taxes. In a rights offer, shareholders who do not wish to purchase
shares of the issue must sell their rights (or subscribe and sell the shares) in order to
avoid losing the value of their subscription rights or warrants. These sales are subject to
capital gains taxes, which are increasing in the subscription price discount, discouraging
large discounts.
(^18) This discussion is partially drawn fromEckbo and Masulis (1995).