The Puzzling Increase in the Underpricing of Seasoned Equity Offerings

Posted: 10 May 2004

See all articles by Kenneth Kim

Kenneth Kim

Tongji University - School of Economics and Management; SUNY at Buffalo - School of Management

Hyun-Han Shin

Yonsei University

Abstract

Using a sample of over 3,000 seasoned equity offerings (SEOs) from 1983 to 1998, we test the hypothesis that the U.S. Securities and Exchange Commission's Rule 10b-21, which disallows the covering of short positions with newly issued SEOs, makes pre-offer stock prices less informative, which, in turn, causes the new seasoned equity to be priced at a discount. Consistent with the hypothesis, we find that the year the rule went into effect coincides with the year from which we begin observing significant SEO discounts. Further, we find that ex ante uncertainty and SEO discounts are positively related. We also conduct tests specifically related to short selling, and we also consider an exhaustive set of alternative explanations for the discounts. Based on all of the evidence, we conclude that it is the rule that makes issue discounts larger in the 1990s.

Keywords: Seasoned equity offerings, underpricing, Rule10b-21, short sale

JEL Classification: G14, G32

Suggested Citation

Kim, Kenneth A. and Shin, Hyun-Han, The Puzzling Increase in the Underpricing of Seasoned Equity Offerings. Available at SSRN: https://ssrn.com/abstract=544712

Kenneth A. Kim (Contact Author)

Tongji University - School of Economics and Management ( email )

Siping Road 1500
Shanghai, Shanghai 200092
China

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Hyun-Han Shin

Yonsei University ( email )

50 Yonsei Ro
Seodaemoon Gu
Seoul
Korea, Republic of (South Korea)
82-2-21235466 (Phone)

HOME PAGE: http://https://ysb.yonsei.ac.kr/faculty.asp?mid=n02&sOpt=&uid=32

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