Management Guidance and the Underpricing of Seasoned Equity Offerings*

Li, Oliver Zhen; Zhuang, Zili

doi:10.1111/j.1911-3846.2011.01120.x

Cited by 41 publications

(31 citation statements)

References 39 publications

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“…They find that firms followed by analysts who work for the lead underwriter or analysts with superior ability exhibit lower SEO underpricing. Similarly, Li and Zhuang () argue that management guidance alleviates information asymmetry around SEOs. They find that the presence of guidance reduces SEO underpricing .…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offers

Intintoli

Jategaonkar

Kahle³

2014

Financial Management

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Despite high levels of asymmetry of information, firms that issue seasoned equity offerings (SEOs) within a year of their initial public offering (IPO) (follow-on SEOs) are able to offer shares at a lower discount as compared to more mature firms. We provide evidence that this seeming contradiction can be explained by a very high degree of demand for the follow-on offering. We find that the likelihood of issuing a follow-on SEO is significantly related to the level of institutional demand and that discounts are lower for follow-on SEOs in which institutional demand is high. We also consider the joint effect of cash holdings and follow-on SEOs on discounts since firms that have recently gone public tend to hold high levels of cash. Underpricing is higher for firms with elevated preoffer levels of cash, which is consistent with market timing predictions. However, this relation is mitigated for both follow-on SEOs and issues that also have high share demand.Numerous papers study the effects of information asymmetry on the cost of raising equity capital and find that firms must issue shares at a discount to entice uninformed investors. In the case of seasoned equity, this underpricing can be substantial. Seasoned equity offering (SEO) underpricing occurs when the offer price is lower than the closing price on the day prior to the offer date. In our sample, which extends from 1991 to 2011, average SEO underpricing is 3.52% of offer proceeds and aggregates to an inflation adjusted $27 billion in money left on the table.Theory suggests that SEO underpricing results directly from information asymmetry among investors (Parsons and Raviv, 1985). Consistent with this theoretical argument, numerous empirical papers find a positive relation between proxies for information asymmetry and SEO discounts (Altinkilic and Hansen, 2003;Corwin, 2003;Mola and Loughran, 2004;Intintoli and Kahle, 2010). However, Intintoli and Kahle (2010) find low underpricing for SEOs occurring within one year of the initial public offering (IPO) (follow-on SEOs). This is surprising since firms pursuing such follow-on SEOs are generally considered to display characteristics normally associated with high information asymmetry. In this paper, we analyze and reconcile the follow-on SEO underpricing puzzle.When we compare follow-on SEO firms to more mature firms issuing SEOs, we find that: 1) underpricing in follow-on SEOs is significantly lower, 2) follow-on SEO firms are smaller, more volatile, and have fewer analysts, and 3) follow-on SEOs are associated with higher IPO underpricing and positive stock returns after the IPO (consistent with Jegadeesh, Weinstein, andWe would like to thank

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offers

Intintoli

Jategaonkar

Kahle³

2014

Financial Management

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“…While some studies of discretionary disclosure use stock price changes as the dependent variable, other studies use stock returns around the disclosure date,

Return = \frac{P (\overset{false~}{y} = y) - P^{I n i t i a l}}{P^{I n i t i a l}}

. For example, Li and Zhuang () use actual stock return underperformance of seasoned equity offerings as a proxy for implied cost of equity capital . Using actual returns, the theoretically predicted relation is linear:

Return = a + b y,

where the intercept is

a = \frac{(- y_{0} + β h_{0}^{- 1}) s {(h_{0} + s)}^{- 1} - c G (Z^{- 1} (c h_{0}))}{(}{, y_{0} - italicβ h_{0}^{- 1} - ()(, 1 - G ()(, Z^{- 1} ()(, c h_{0}))) c)},

and the slope coefficient is

b = s {()(, h_{0} + s)}^{- 1} {\{y_{0} - β h_{0}^{- 1} - (1 - G (Z^{- 1} (c h_{0}))) c\}}^{- 1} .

…”

Section: Resultsmentioning

confidence: 99%

“…A recent empirical‐archival study by Li and Zhuang () acknowledges the endogeneity of the manager's disclosure decision and implements numerous controls, including using instrumental variables as in Heckman (). Specifically, they proxy for uncertainty and information asymmetry (corresponding to our h 0 and s , respectively) using firm size and stock return volatility, respectively.…”

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confidence: 99%

Discretionary Disclosures to Risk‐Averse Traders: A Research Note

Jørgensen

Kirschenheiter

2015

Contemporary Accting Res

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Verrecchia (1983) investigates a manager's incentives for costly, discretionary disclosure of his information to risk‐averse traders when the functional form of prices is exogenously specified. We extend Verrecchia (1983) by deriving the endogenously determined functional form of prices that would arise when all traders have constant risk tolerance. We show that these endogenously determined prices are inconsistent with the assumed prices in Verrecchia (1983) when the manager elects to not disclose. We derive the manager's disclosure strategy for our setting and extend the comparative static results in Verrecchia (1990) for risk‐neutral traders to a setting where traders have constant risk tolerance and prices are endogenously derived. Further, in our setting, discretionary disclosure does not affect how traders price risk of different outcomes. Also, we offer a representation of risk‐averse traders' prices using risk‐adjusted distributions. Finally, these results provide implications for empirical‐archival discretionary disclosure studies.

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“…Beyer, Cohen, Lys, and Walther (2010, p.300) conclude that in the decade leading up to their study, MEFs provided about 55% of the accounting information available to equity investors. Baginski and Rakow (2012) and Li and Zhuang (2012) report that MEFs reduce information asymmetry between a firm and its equity investors and thus lower the cost of equity capital. Findings about MEFs in equity markets, however, may not generalize to debt markets because debt holders have different informational needs than equity investors.…”

Section: Introductionmentioning

confidence: 99%

Do Management Earnings Forecasts Matter in Loan Markets and Why?

Krupa¹

2020

Preprint

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Management earnings forecasts (MEFs) may enhance the credibility of lenders' private information received from borrowers and therefore reduce information risk. Consistent with this idea, we find that among firms with a general policy of issuing MEFs, those providing MEFs within six months before loan origination with a forecast horizon beyond the origination date enjoy lower loan spreads. The frequency and precision of MEFs are also negatively associated with loan spreads. The associations are stronger when lenders' need for corroboration of their private information is expected to be greater. The associations are not driven by a firm's general information environment, signaling of managerial ability, or opportunistic disclosure. Moreover, the occurrence, frequency, and precision of MEFs are associated with loan amounts more spread out among participating lenders, suggesting that MEFs reduce information asymmetry within a loan syndicate. Our study provides insight into the role of publicly disseminated MEFs in private loan markets.

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Management Guidance and the Underpricing of Seasoned Equity Offerings*

Cited by 41 publications

References 39 publications

The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offers

The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offers

Discretionary Disclosures to Risk‐Averse Traders: A Research Note

Do Management Earnings Forecasts Matter in Loan Markets and Why?

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