The Underpricing of Seasoned Equity Offerings: 1983-1998

Abstract

Using a sample of over 3,000 seasoned equity offerings (SEOs) from 1983 to 1998, we find significant SEO discounts (underpricing) during the 1990s, but not during the 1980s. The natural question is: Why do we observe a difference between the 1980s and 1990s? Among the different explanations that we considered, one stood out as being most culpable: In 1988, the SEC adopted Rule 10b-21 to curb manipulative short-selling activities preceding equity issue dates. Thus, this change in the regulatory environment for SEOs may have caused the larger discounts. Indeed, the year the Rule went into effect coincides with the year from which we begin observing significant SEO discounts. We considered an exhaustive set of alternative explanations, including new theories that have arisen out of the recent IPO underpricing literature, but our overall conclusion remains intact: The Rule's restriction on short-selling, which makes pre-offer day prices less informative, appears to have made issue discounts larger in the 1990s.

Keywords: Seasoned equity offerings, underpricing, Rule 10b-21, short sale

JEL Classification: G14, G32