Seasoned Equity Offerings Quality of Accounting Information and Expected Flotation Costs

ARTICLE IN PRESS
Journal of Financial Economics 92 (2009) 443–469

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Seasoned equity offerings: Quality of accounting information and expected flotation costs$
Gemma Lee a, Ronald W. Masulis b,Ã a b

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Accruals quality Dechow and Dichev model Offer size Flotation costs Announcement effect Underwriting fees Gross spread Withdrawn offers Cancelled SEOs

abstract
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

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