Journal of Financial Economics 92 (2009) 443–469
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Journal of Financial Economics
journal homepage: www.elsevier.com/locate/jfec
Seasoned equity offerings: Quality of accounting information and expected ﬂotation costs$ Gemma Lee a, Ronald W. Masulis b,Ã
W. Paul Stillman School of Business, Seton Hall University, South Orange, NJ 07079, USA Owen Graduate School of Management, Vanderbilt University, Nashville, TN 37203, USA
a r t i c l e in fo
Article history: Received 30 January 2007 Received in revised form 22 February 2008 Accepted 25 April 2008 Available online 3 March 2009 JEL classiﬁcations: D82 G12 G14 G24 G32 M41 M43 Keywords: Seasoned equity offering SEO Stock offer Stock issue Asymmetric information Accounting information Accruals quality Dechow and Dichev model Offer size Flotation costs Announcement effect Underwriting fees Gross spread Withdrawn offers Cancelled SEOs
Flotation costs represent a signiﬁcant loss of capital to ﬁrms and are positively related to information asymmetry between managers and outside investors. We measure a ﬁrm’s information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a ﬁrm’s ﬁnancial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a ﬁrm’s new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher ﬂotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and ﬂotation cost components and to adjustments for sample selection bias. & 2009 Published by Elsevier B.V.
$ We want to especially thank an anonymous referee, Anup Agrawal, Paul Chaney, Douglas Cook, Debra Jeter, Junsoo Lee, Craig Lewis, Michelle Lowry, Veronika Krepely Pool, David Reeb, and Harris Schlesinger for their many helpful comments and suggestions. We also thank the workshop participants at Auckland University, Pennsylvania State University, Vanderbilt University, University of Kentucky, University of Alabama, Korea Advanced Institute of Science and Technology (KAIST), Seoul National University, Sogang University, Seton Hall University, Temple University, and Sungkyunkwan University and conference participants at the 2006 Financial Management Association Annual Meetings, 2007 Northern Finance Association Annual Meetings, and 2007 Korea Securities Research Institute-Korea America Finance Association Joint Conference for their helpful suggestions. This study is largely based on the second essay of Gemma Lee’s Ph.D. Dissertation at Vanderbilt University. Ã Corresponding author. E-mail address: firstname.lastname@example.org (R.W. Masulis).
0304-405X/$ - see front matter & 2009 Published by Elsevier B.V. doi:10.1016/j.jﬁneco.2008.04.010
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444 G. Lee, R.W. Masulis / Journal of Financial Economics 92 (2009) 443–469
1. Introduction Flotation costs in seasoned equity offers (SEOs) represent an economically important portion of gross proceeds. Many studies show that underwriting fees range between 3% and 8% of SEO gross proceeds and that SEO announcement effects range between À2% and À3%. The extant literature has generally concluded that a substantial portion of SEO ﬂotation costs are caused by asymmetric information between issuers and outside investors. (See the discussion in...