The Rule 415 Experiment: Equity Markets

Abstract

Rule 415 allows a firm to register all the securities it reasonably expects to sell over the next two years and then, at the management's option, to sell those securities over these two years whenever it chooses. This paper examines whether equity offerings made under Rule 415 (shelf offerings) differ in issuing costs from equity offerings not sold under this rule. We find that shelf offerings cost 13% less for syndicated issues and 51% less for nonsyndicated issues. We also investigate the empirical relevance of the market overhang argument which suggests that shelf registrations depress the price of the registering firm's shares more than traditional registrations. Our data does not support the market overhang argument. THE SECURITIES AND EXCHANGE Commission's (SEC) Rule 415, which waspermanently adopted for large firms in November, 1983, allows a firm to register all the securities that it reasonably expects to sell over the next two years and then sell those securities whenever it chooses. This procedure is known as shelf registration. Investment bankers, securities regulators, and corporate issuers vigorously debate the effect of Rule 415 on firms' issuing cost for new securities. Some (mostly investment bankers) argue that Rule 415 increases new issue costs while others (mostly issuers) argue that Rule 415 decreases new issue costs.In addition, many investment bankers argue that placing common stock "on the shelf" depresses the price of a firm's outstanding shares of stock. Most issuers, in contrast, fail to believe this argument of share price depression. This paper examines the influence of shelf registration on the issuing cost of new common shares for a company. More specifically, using a sample of 344 new common stock issues of NYSE and Amex companies made from March 17, 1982 through December 31, 1983, we investigate: (a) whether an issuer selling common stock under Rule 415 incurs a lower cost than an issuer selling common stock by a traditional method of sale, and (b) whether shelf registrations depress stock prices more than traditional registrations. The answers to these questions provide

Information Asymmetry, Valuation, and the Corporate Spin-off Decision

“…Finally, following Bhagat et al (1985), Blackwell et al (1990), and Krishnaswami et al (1999), we use the residual volatility in daily stock returns as the "fth proxy for information asymmetry. Information asymmetry about a "rm is high when managers have a relatively large amount of value-relevant, "rm-speci"c information that is not shared by the market.…”

Information Precision, Noise, and the Cross-Section of Stock Returns

“…Multiplying two times the standard deviation by the regression coefficient gives an estimate of the monthly return dispersion predicted by the variable. 6 Errors in variables issues are addressed in two ways. First, we apply the Shanken (1992) corrections to our regression results in this section and find similar results (available from authors upon request).…”

The Costs of Equity Issues Since Rule 415: A Closer Look

“…The characteristics of the sample offerings are similar in magnitude to those documented in previous studies. Bhagat, Marr, and Thompson (1985) and Blackwell, Marr, and Spivey (1990) find that the offerings of shelf issuers are characterized by lower stock return variability, larger issue size, and lower incidence of syndication. While the sample‐selection procedure used here results in a slightly smaller sample than those of previous studies, the sample appears to be representative.…”

“…Bhagat, Marr, and Thompson (1985) empirically examine issuing costs in shelf and nonshelf offerings and find that shelf offerings have significantly lower costs. These cost differentials are due primarily to significantly lower underwriter spreads for shelf offerings.…”