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Do shareholder rights influence the direct costs of issuing seasoned equity?

  • Don M. Autore
  • Jeffrey Hobbs
  • Tunde Kovacs
  • Vivek Singh
Original Research
  • 129 Downloads

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.

Keywords

Shareholder rights Anti-takeover provisions Investment banks Seasoned equity offers Gross underwriter spreads Offer price discounts 

JEL Classification

G32 G34 

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Finance, College of BusinessFlorida State UniversityTallahasseeUSA
  2. 2.Department of Finance, Banking and Insurance, Walker College of BusinessAppalachian State UniversityBooneUSA
  3. 3.Management Department, The Robert J. Manning School of BusinessUniversity of Massachusetts-LowellLowellUSA
  4. 4.Department of Accounting and Finance, College of BusinessUniversity of Michigan-DearbornDearbornUSA

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