Do Shareholder Rights Influence The Direct Costs Of Issuing Seasoned Equity?

ASU Author/Contributor (non-ASU co-authors, if there are any, appear on document)
Jeffrey Hobbs PhD, Professor (Creator)
Appalachian State University (ASU )
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Abstract: We test the hypothesis that underwriters set higher gross spreads and deeper offer price discounts in seasoned equity offers of firms exhibiting weak shareholder rights as compensation for increased reputational risk and legal liability. Alternatively, if market participants are fully aware of the risks related to weak shareholder rights and efficiently price them, then underwriters arguably do not need to adjust issuance costs for firms with weak governance. Our results indicate that, on average, shareholder rights and direct issue costs are unrelated, supporting an efficient pricing view. However, upon closer examination, we find that underwriters charge higher gross spreads when the issuing firm has either an extremely low level of shareholder rights or a substantially lower level than expected, which are likely the cases in which the underwriter’s reputational risk is highest.

Additional Information

Autore, D.M., Hobbs, J., Kovacs, T. et al. Rev Quant Finan Acc (2018). Publisher version of record available at:
Language: English
Date: 2018
Shareholder rights, Anti-takeover provisions, Investment banks, Seasoned equity offers, Gross underwriter spreads, Offer price discounts

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