Direct Equity Financing: A Resolution of a Paradox

Authors

  • ROBERT S. HANSEN,

  • JOHN M. PINKERTON

    Search for more papers by this author
    • Virginia Polytechnic Institute and State University, Blacksburg. The authors gratefully acknowledge insightful comments and suggestions of the referee Clifford Smith and the editorial comments of Michael Brennan. Any remaining errors are, of course, ours.

ABSTRACT

When raising new equity capital managers have historically rejected the direct offer method favoring instead the seemingly more expensive underwritten public issue. This paper provides a resolution for this equity financing paradox by demonstrating empirically that firms which engage in direct offers enjoy a comparative cost advantage that is more than sufficient to account for the absolute reported cost differences between the two methods of equity financing.

Ancillary