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

Authors

  • Vincent J. Intintoli,

  • Shrikant P. Jategaonkar,

  • Kathleen M. Kahle

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    • Vincent J. Intintoli is an Assistant Professor of Finance in the College of Business at Southern Illinois University Carbondale in Carbondale, IL. Shrikant P. Jategaonkar is an Assistant Professor of Finance in the School of Business at Southern Illinois University Edwardsville in Edwardsville, IL. Kathleen M. Kahle is an Associate Professor of Finance in the Eller College of Management at The University of Arizona in Tucson, AZ.


  • We would like to thank Ariel Belasen, Xudong Fu, Jason Greene, Jean Helwege, Jan Jindra, Sandy Klasa, Ronald Oaxaca, Andrew Zhang, Marc Lipson, and Raghu Rau (Editors), and an anonymous referee for useful comments. Kelli Bittle, Andrew Koch, and Sara Shirley provided excellent research assistance. Previous versions of this paper were titled “Why is SEO Underpricing Lower for Recent IPO Firms?”

Abstract

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.

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