Ch. 6: Security Offerings 357
ods. On the one hand, the large increase in the aggregate amount of securities offerings
over the past 25 years suggest that the stricter disclosure requirements has had a positive
effect on firms’ incentives to issue securities. However, additional analysis is needed of
the specific effects of the new SEC securities regulations on disclosure requirements,
shelf registrations and the creation of “well-known seasoned issuers”. Do these regula-
tory changes have a significant effect on flotation costs, the choice of offering methods,
the types of securities issued and timing of offerings? Is there evidence that these new
rules lower asymmetric information between issuers and investors? How do the new
regulations affect the frequency of foreign security issues in the U.S.?
One of the early regulatory experiments that financial economists studied was SEC
Rule 415, known as shelf registration. This regulatory change was designed to lower
issue costs. As we show inTable 3, only fifteen percent of the SEOs by U.S. firms em-
ploy the shelf registration procedure (half of the debt issuers use shelf registration). SEO
shelf offerings tend to be relatively large-but infrequent. The apparent reluctance to take
advantage of the relatively low-cost shelf registration procedure is puzzling. It is possi-
ble that shelf registration exacerbates adverse selection in issue markets, and is therefore
selected only by relatively transparent firms (where the information asymmetry is rela-
tively low). Such self-selection of the issue method suggests that the market reaction to
shelf issues should be no lower than the market reaction to traditional non-shelf (under-
written) issues, which is broadly consistent with the reported empirical evidence.
As a general matter, the field would benefit from further analysis of the endogeneity
of the choice of security offered and flotation method. The existing literature gener-
ally adjusts for endogeneity using predictive models of the issuer’s choice of securities
and issue method with very modest explanatory power. In estimating such a model, we
need to know to what extent are the types of securities issued, their flotation costs and
issuance method affected by issuer investment and financing characteristics, asset struc-
ture, capital structure, industry identity and the issuer’s corporate governance? We also
need better predictive models of an issuer’s choice of security to sell. Hence, there is a
need for further theoretical and empirical research to improve the explanatory power of
these predictive models. After which, we need to re-evaluate the robustness of the major
results in the prior literature.
Another important regulatory experiment is the 2002 enactment of Sarbanes–Oxley.
This landmark legislation has imposed substantial corporate governance constraints and
obligations on publicly held companies, preempting state corporation law in a number
of areas. A number of the interesting questions are raised by the law. What are the ef-
fects of Sarbanes–Oxley on domestic and foreign issuers of securities in the U.S.? How
does this law affect auditor independence and the reliability of auditor certification of
the financial statements or the market reaction to news of issuer–auditor disagreements?
How does this law change the likelihood of earnings restatements and shareholder reac-
tions to new financial statements? What is the importance of board of directors’ powers
relative to shareholder powers and the potential benefits of giving shareholders stronger
voting rights and control rights in determining the security issuance decision and the
costs of security issuance? We need a clearer understanding of how security contract