Seasoned Equity Offers: The Effect of Insider Ownership and Float

Abstract

Seasoned equity offering (SEO) underpricing has increased dramatically since the early 1980s. While previous research has examined the determinants of SEO underpricing, these studies have not explored the effect of insider ownership on discounts. We find that this effect is twofold. First, higher insider ownership reduces float, thereby increasing price pressure and SEO underpricing. This effect is greatest in firms with low liquidity. Second, the greater the percentage of secondary shares offered, the lower the underpricing, suggesting that manager's pressure banks to reduce underpricing when their personal wealth is at stake. However, we find that this negative relation is mitigated if the firm employs a prestigious underwriter.

Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?

“…For the sample of 294 issues for which we can calculate Relsize2 , there is little difference in the significance of offer size in relation to existing shares ( Relsize1 ) and free float ( Relsize2 ). So we do not echo the finding of Intintoli and Kahle () for US firm commitments that size in relation to free float has greater explanatory power.…”

“…A larger offer in relation to the size of the issuer is associated with a deeper discount, and this is often seen as evidence for inelastic demand in firm‐commitment offers (for example, Corwin, ). Intintoli and Kahle () find that relative size is a more significant explanatory variable when offer size is measured as a proportion of the free float, which supports the inelastic‐demand interpretation. Huang and Zhang () view the number of lead underwriters as a proxy for marketing effort, and they argue that the benefit of marketing is greater elasticity and a smaller discount.…”

Wealth Effects of Seasoned Equity Offerings: A Meta‐Analysis

“…The sample size of the studies that we include varies considerably. The largest study included in the analysis in Table contains 7720 observations (Intintoli and Kahle ) and the smallest study only contains 19 observations (Wansley and Dhillon ) . Also, the variability of the mean CARs varies substantially between different studies that cover different time periods and countries.…”

Are the Discounts in UK Open Offers and Placings Due to Inelastic Demand?

“…A larger offer in relation to the size of the issuer is associated with a deeper discount, and this is often seen as evidence for inelastic demand in firm-commitment offers (for example, Corwin, 2003). Intintoli and Kahle (2009) find that relative size is a more significant explanatory variable when offer size is measured as a proportion of the free float, which supports the inelastic-demand interpretation. Huang and Zhang (2011) view the number of lead underwriters as a proxy for marketing effort, and they argue that the benefit of marketing is greater elasticity and a smaller discount.…”