Do shareholder rights influence the direct costs of issuing seasoned equity?
Don M. Autore (),
Jeffrey Hobbs (),
Tunde Kovacs () and
Vivek Singh ()
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Don M. Autore: Florida State University
Jeffrey Hobbs: Appalachian State University
Tunde Kovacs: University of Massachusetts-Lowell
Review of Quantitative Finance and Accounting, 2019, vol. 52, issue 1, 1-33
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 (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
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