Underwriting Fees and Shareholder Rights

Abstract

Do firms' governance provisions affect their terms of obtaining external financing? We hypothesize that it is more difficult for firms with more restrictions on shareholder rights to raise external equity, and that since analyst coverage is an important part of underwriting services, underwriters would use analyst recommendations to promote issuing firms with weaker shareholder rights more strongly and charge them higher underwriting fees. Consistent with our hypothesis, we find that analyst recommendations on issuing firms with weak shareholder rights increase more than those with strong shareholder rights prior to SEOs, and that underwriting spreads are positively related to issuing firms' shareholder rights as proxied by the G-index. Furthermore, the effect of shareholder rights on underwriting fees is largely contained in the six provisions in the E-index.

Rights Offerings and Expropriation by Controlling Shareholders

“…Our results are broadly consistent with those of Jung et al. (), Kim and Purnanandam () and Lin and Ulupinar (). They focus on corporate governance problems associated with general cash offers, whereas we focus on potential conflicts regarding rights offerings between controlling shareholders and other shareholders.…”

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

“…They argue that as information asymmetry is low for such firms, the price fall is partly explained by inelastic demand . Altinkiliç () and Meidan () find weak evidence of temporary price pressure during the book‐building period in firm commitments. Gao and Ritter () argue that the purpose of the marketing effort during firm commitments is to increase demand elasticity in order to reduce downward pressure on the share price.…”

“…First, companies choosing firm commitments are much larger than those choosing private placements, and larger size is associated with greater elasticity of demand and liquidity for the shares . Second, firm‐commitment offers are marketed by an underwriting syndicate during the public book‐building period, with the purpose of creating demand (Gao and Ritter, ; Huang and Zhang, ; Lin and Ulupinar, ). In UK open offers and placings, the pre‐announcement marketing is conducted on a private basis and investors who are informed about the placing agree not to trade or disclose the information before it is announced publicly.…”

The Founder certification effect, firm disclosures, and the cost of SEO financing

“…(1996), other studies, such as Fu (2010), have shown that inefficient use of SEO proceeds can lead to long‐term post‐SEO underperformance. Consistent with the argument that agency problems can be mitigated through better firm governance, it has also been shown that SEO costs are lower for firms with more independent directors on board (Ferreira & Laux, 2016), better shareholder rights (Autore et al, 2019; Kim & Purnanandam, 2014; Lin & Ulipinar, 2013) and short‐term institutional shareholders (Hao, 2014). In this study, we extend the arguments on the effect of better governance on SEO costs by examining the role of founder control as a governance mechanism.…”