Bought deals: The value of underwriter certification in seasoned equity offerings

Selection Bias and the Underwriter Certification of the Largest Shareholders in Seasoned Equity Offerings

“…Our results in Table for the variable REPUTATION_IB show that the offers underwritten by an investment bank with a larger market share are associated with larger price drops around the announcement dates. The finding is consistent with the evidence from Pandes () who also documents that the book runner who has the market share ranked in the top 10 in the year of the completed offers leads to greater price declines around the announcements of firm commitment public offerings and bought deals in Canada. These results question the validity of the market share of an investment bank as a measure of underwriter quality .…”

“…The results confirm that there is an endogeneity problem of the underwriter choice (TYPE) for both rights issues and open offers, and the largest shareholders self-select into their preferred issuing firms to be the SEO underwriters. 20 After 19 These variables include (i) the standard deviation of the residuals (SE) from a standard marketmodel regression as a proxy for the firm-specific risk (Denis 1991;Balachandran et al 2008;Pandes 2010); (ii) Beta (A_BETA), a proxy for underwriting risk that cannot be reduced by diversification (Ng and Smith 1996); (iii) the market-to-book ratio (Ln(M/B)), a proxy for potential growth prospects (D'Mello et al, 2003;Balachandran et al 2008); (iv) free cash flows-to-total assets ratio (FCF) is the corporate finance variable to examine the potential conflict between the largest shareholder and minority shareholders in a family-controlled firm, as proponed by Jensen (1986); (v) a dummy variable CONS that equals to one if the offer is involved in share consolidations as part of capital reorganizations of an issuing firm and zero otherwise. It serves as a proxy for financing conditions and firm quality (Armitage 2002;Ursel 2006); (vi) Ln(EX_DAY) could measure the complexity level and price risk of an offer; (vii) the dividend yield (DIV), a firm quality proxy (Denis 1994;Wu et al 2005); (viii) return on assets (ROA), a proxy for firm quality; (ix) price discount (DIS), a proxy for firm quality (Heinkel and Schwartz 1986;Slovin et al 2000); (x) both the firm age (Ln(AGE)) and the firm size (Ln(F_SIZE)) are used as the proxies for the level of information asymmetries (Wu et al 2005); (xi) the ratio of gross proceeds to the market value of an issuing firm (R_SIZE) to measure the size of investment opportunities relative to firm size (Slovin et al 2000); and (xii) METHOD, MARKET, and FIN, as defined earlier, are the rest of control variables.…”

“…2 Lee et al (2014), Ching et al (2006), and Wu and Wang (2005b) find that the 3-day cumulative average abnormal return from day À1 to day 1 is more than À7.5%, but the average announcement return of the corresponding rights issues for industrial firms in the US and in the UK is only about À2.09% (Hansen 1988;Eckbo and Masulis 1992;Slovin et al 2000). 3 See Booth and Smith (1986), Blackwell et al (1990), Denis (1991), Hansen and Torregrosa (1992), Eckbo and Masulis (1992), Kumar and Tsetsekos (1993), Puri (1996), and Pandes (2010) for more details.…”

The role of co-managers in reducing flotation costs: Evidence from seasoned equity offerings

“…More recently, 1 Booth and Smith (1986) and Eckbo and Masulis (1992) presume that underwriters provide a valuable service by certifying that the issuing firm's shares are not mispriced. Pandes (2010) provides evidence regarding certification value using Canadian ''bought deals." 2 However, empirical studies examining the relation between the underwriter reputation and information asymmetries at the lead underwriter level report mixed evidence.…”

The role of internal and external certification mechanisms in seasoned equity offerings

“…Pandes (2010), for example, reports that accelerated offerings, called bought deals, dominate Canadian SEOs. Over its sample period of 1993 through 2005, 72% of the SEOs in its sample are bought deals and they account for about 57% of the total proceeds raised by all the SEOs.…”