 Option implied volatilities and the cost of issuing equityAndy Fodor and Sinan Gokkaya Journal of Banking & Finance, 2014, vol. 47, issue C, 88-101 Abstract: The structure of a firm-commitment Seasoned Equity Offering (SEO) resembles a put-option underwritten by an investment bank syndicate (Smith, 1977). Employing implied volatilities from issuers’ stock options as a direct forward-looking measure, this paper examines the impact of expected price risk around SEO issue dates on the direct cost of issuing equity. Using a comprehensive sample of 1208 SEOs between 1996 and 2009, we find issuers with higher option implied volatilities raise less external equity capital and pay higher investment bank fees in the stock market, ceteris paribus. The effect of implied volatility on the investment bank fees is stronger for larger issuers with lower pre-SEO abnormal realized stock volatilities, and for SEOs with higher expected price pressures around issue dates. These relationships are robust to adjustments for correlations among control variables, sample selection bias and also simultaneous determination of offer size and SEO fees. Keywords: Seasoned Equity Offering; Implied volatility; Cost of equity; Price risk; Investment bank fees (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:47:y:2014:i:c:p:88-101 DOI: 10.1016/j.jbankfin.2014.06.019 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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