The Puzzling Increase in the Underpricing of Seasoned Equity Offerings


  • We gratefully acknowledge the numerous suggestions provided by two anonymous referees and by Steve Ferris (the editor). For comments on earlier versions of our article, which circulated under the title, “The Underpricing of Seasoned Equity Offers: 1983–1998,” we would like to thank Sung Bae, Jeff Harris, Yong-cheol Kim, René Stulz, J. Van Bommel, Qinghai Wang, seminar participants at Ohio State University, the U.S. Securities and Exchange Commission, the 2001 European Finance Association meeting (in Barcelona), the 2001 PACAP meeting (in Seoul), and the 2001 Financial Management Association meeting (in Toronto). We are also grateful to several investment bankers for educating us on the SEO pricing process.

* Corresponding author: The State University of New York at Buffalo, School of Management, 344 Jacobs Management Center, Buffalo, NY 14260; Phone: (716) 645-3266, Fax: (716) 645-3823; E-mail:


Using a sample of over 3,000 seasoned equity offerings (SEOs) from 1983 to 1998, we test the hypothesis that the U.S. Securities and Exchange Commission's Rule 10b-21, which disallows the covering of short positions with newly issued SEOs, makes pre-offer stock prices less informative, which, in turn, causes the new seasoned equity to be priced at a discount. Consistent with the hypothesis, we find that the year the rule went into effect coincides with the year from which we begin observing significant SEO discounts. Further, we find that ex ante uncertainty and SEO discounts are positively related. We also conduct tests specifically related to short selling, and we also consider an exhaustive set of alternative explanations for the discounts. Based on all of the evidence, we conclude that it is the rule that makes issue discounts larger in the 1990s.