The Determinants of Underpricing for Seasoned Equity Offers

Authors

  • Shane A. Corwin

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    • Corwin is at the Mendoza College of Business, University of Notre Dame. I thank Rick Green and an anonymous referee for valuable suggestions. I also thank Jeff Bacidore, Andrew Blum, Mara Faccio, Robert Jennings, Tim Loughran, Steve McAuley, Simona Mola, Paul Schultz, Rich Sheehan, George Sofianos, David Topper, and seminar participants at the University of Notre Dame for helpful comments. All remaining errors are my own. Financial support for this research was provided by the New York Stock Exchange. The comments and opinions expressed in this paper are the author's and do not necessarily reflect those of the directors, members, or officers of the New York Stock Exchange, Inc.

Abstract

Seasoned offers were underpriced by an average of 2.2 percent during the 1980s and 1990s, with the discount increasing substantially over time. The increase appears to be related to Rule 10b-21 and to economic changes affecting both IPOs and SEOs. Consistent with temporary price pressure, underpricing is positively related to offer size especially for securities with relatively inelastic demand. Underpricing is also positively related to price uncertainty and, after Rule 10b-21, to the magnitude of preoffer returns. Additionally, I find that underpricing is significantly related to underwriter pricing conventions such as price rounding and pricing relative to the bid quote.

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