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The impact of surprise offer-share adjustments on offer-day returns: evidence from seasoned equity offers

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Abstract

Using a sample of seasoned equity offerings (SEOs), we examine the eleventh-hour information carried by the final offer-share adjustment. We argue that if market participants interpret the final offer-share adjustment as a new information signal regarding the demand for the stocks issued, a greater final offer-share adjustment will affect the offer-day return positively (demand information hypothesis). Alternatively, if investors interpret the final offer-share adjustment as increasing the supply of stocks issued and/or as diluting the value of existing shares, a greater final offer-share adjustment will affect the offer-day returns negatively (price-pressure and dilution hypothesis). We provide empirical evidence that the offer-day returns are positively related to the final offer-share adjustment after controlling for confounding factors, supporting the demand information hypothesis. Our results also remain intact even after controlling for the endogeneity. Overall, our findings suggest that the final offer-share adjustment is another important determinant of offer-day returns, in addition to the final offer-price adjustment that Altinkiliç and Hansen [J Financ Econ 69(2):285–323 (2003)] report.

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Notes

  1. The “eleventh-hour” refers to the last moments before a deadline, or implies that a decisive or “final" moment is near. This term is thought to allude to the parable of the laborers (New Testament, Matthew 20:1–16), in which those workers hired at the eleventh hour of a twelve-hour working day were paid the same amount as those who began in the first hour (see Ammer 1992).

  2. Our claim might apply to IPOs as well. However, the closing price on the day prior to the offer date is not available in IPOs. While the lead underwriter may negotiate the offer price and the number of shares to be offered with the offering firm on the day prior to an IPO and information about adjustments to the shares and prices may be revealed prior to the offer date, this information will not be reflected in stock prices until the offer date. For instance, one day before the Netscape’s scheduled IPO, Netscape’s lead underwriters, Morgan Stanley and H&Q proposed to the board a 100% increase in the original offering price from $14 to $28 per share. This recommendation came in response to the remarkable oversubscription of Netscape’s shares, which had already prompted the underwriters to increase the number of shares to be offered from 3.5 million to 5 million. Netscape’s board agreed to increase the offer price to $28 on the offer date of August 9, 1995, and Netscape’s offer-day closing price was $58.25 (Backstrand 1996).

  3. The underpricing of SEOs has drawn much attention among financial economists recently. Several studies (e.g., Altinkiliç and Hansen 2003; Corwin 2003; Mola and Loughran 2004) report that the underpricing of SEOs has become commonplace and that the magnitude of SEO underpricing has increased more dramatically in the 1990s than it did during earlier periods. Corwin (2003) documents that SEO underpricing increased to 2.92% for offers during the 1990–1998 period from 1.15% for offers in the 1980s and that the average reached a high of 3.72% in 1996.

  4. Previous studies suggest that share amendment also can change the relation between earnings and returns. Huson et al. (2001) argue that expected dilution due to executive stock options and convertible securities attenuate the relation between earnings and returns. Andrade (1999) finds that the earnings per share (EPS) accretion has a positive effect on acquirer abnormal performance. Bens et al. (2003) claim that managers are more likely to undertake stock repurchases to increase the reported EPS when earnings fall short of the levels necessary to sustain prior growth rates in the reported EPS.

  5. We delete shelf offerings because the shelf offer filing price can be from an earlier shelf filing, and thus the difference between offer price and filing price is not meaningful.

  6. For some of the offers, the filing price as reported in SDC does not have a high or low filing range. In such cases, the midrange file price is equal to both the low and high filing prices.

  7. We will observe a positive association between the final offer-share adjustment and the return on the date prior to the offering, if information that affects the stock return on the day  −1, also influences the issuer and underwriter’s decision on the final number of shares to be offered. Alternatively, if there is any information leakage about what the number of shares offered is going to be, then we will observe the same positive association.

  8. In an effort to check the robustness of the results, we include the number of shares filed as an independent variable rather than OFFERSIZE. Our unreported evidence suggests the results are qualitatively the same with the t-value of 2.98 for RET 0 and 4.11 for RET −10. We also replicate this analysis with the offer-share adjustment scaled by the number of shares filed instead of the total number of shares outstanding prior to the offer and find the results are qualitatively the same.

  9. The median of the “waiting period,” the period between the date of filing and the offer date, is 35 days in our sample and it is usually 35–45 days in seasoned equity offerings (Rangan 1998; Jo and Kim 2007; Jo et al. 2007).

  10. Sopranzetti et al. (2006) find that in IPOs, the measures of price support and underpricing are substantially affected by beginning price.

  11. We appreciate an anonymous referee for his (her) suggestion of this point.

  12. We also employ other dependent variables, such as RET −1, RET 0, and RET 1, and replicate regression analyses. The unreported results are qualitatively similar to those reported in Table 8 except for the results using RET 1. To conserve space, we only report the regression results using RET −10.

  13. The results are qualitatively the same when we use OFFERSIZE instead of SHARESFILED as control variables in simultaneous equations.

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Acknowledgements

We are grateful to two anonymous referees, Joseph Ogden, and seminar participants of 2007 Southwestern Finance Association Conference for their valuable comments. Jo acknowledges financial support from the Dean Witter Foundation and the Breetwor Fellowship. Kim acknowledges support from the Accounting Development Fund of Santa Clara University. Park acknowledges financial support from School of Business at Virginia Commonwealth University.

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Authors and Affiliations

  1. Department of Finance, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA, 95053-0388, USA

    Hoje Jo

  2. Department of Accounting, Leavey School of Business, Santa Clara University, 500 El Camino Real, Santa Clara, CA, 95053-0388, USA

    Yongtae Kim

  3. Department of Accounting, School of Business, Virginia Commonwealth University, 1015 Floyd Avenue, Richmond, VA, 23284-4000, USA

    Myung Seok Park

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  1. Hoje Jo
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Correspondence to Myung Seok Park.

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Jo, H., Kim, Y. & Park, M.S. The impact of surprise offer-share adjustments on offer-day returns: evidence from seasoned equity offers. Rev Quant Finan Acc 31, 261–286 (2008). https://doi.org/10.1007/s11156-007-0071-6

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