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Unallocated shelf Registration: Why doesn’t Everybody Use It?

Unallocated shelf Registration: Why doesn’t Everybody Use It?. Jennifer Bethel and Laurie Krigman Babson College. Discussion by: Helen Bowers University of Delaware. Information asymmetry. Information asymmetry: % Bid-ask spread

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Unallocated shelf Registration: Why doesn’t Everybody Use It?

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  1. Unallocated shelf Registration: Why doesn’t Everybody Use It? Jennifer Bethel and Laurie KrigmanBabson College Discussion by: Helen Bowers University of Delaware

  2. Information asymmetry • Information asymmetry: % Bid-ask spread • Decomposes into order processing, inventory and adverse selection components • Bethel and Krigman isolate the adverse-selection (information asymmetry) component by including share turnover in multivariate analysis Frontiers of Finance January 2005

  3. Findings • On average, no evidence of market overhang (price discount ahead of equity offering) • High information asymmetry firms experience large, statistically significant overhang • Market should not respond negatively to equity offerings if firms have valuable investment opportunities and limited free cash flow • Low information asymmetry firms experience no market overhang • High information asymmetry firms tend to choose traditional registration Frontiers of Finance January 2005

  4. Form S-3 Firms • Only firms eligible to register securities on Form S-3 can register securities on unallocated shelves • Aggregate market value of voting shares held my nonaffiliates must be at least $75 million • Firms must not have defaulted on debt, preferred stock or rental payments • Firm must meet all SEC disclosure requirements for the last 12 months • Debt must be investment grade Frontiers of Finance January 2005

  5. Frontiers of Finance January 2005

  6. Unallocated Shelf Four day CAR (-1 to +2) around filing announcement Four day CAR (-1 to +2) around takedown announcement Findings Filing CAR not statistically significant Takedown CAR negative, significant Combined CAR negative, significant Cost of Issuance Frontiers of Finance January 2005

  7. Filling Announcement Return • wi is the portion of the offering composed of that security • ti is the expected time the securities will be issues over the next two years • O is the amount of the unallocated shelf • Both are uncertain and discounted to present • Shelf can contain many possible, difference security offerings Frontiers of Finance January 2005

  8. Troubling Univariate Findings • Shelf Registration • Widest spreads and narrowest spreads have lowest filing announcement CARs • However, only widest spreads are significant • Middle spread quartiles have lowest TD CARs • Widest spreads combined CARs are only marginally significant • Traditional SEO • Middle quartile are lowest • None of the quartiles are significantly diferent from each other Frontiers of Finance January 2005

  9. Benefits of Unallocated Shelf • Significantly lower Gross Spread (3.77% vs 3.89%) • Significantly lower SEO discount (2.10% vs 2.62%) • Significantly lower days in registration (9.0 vs. 44.8) • Find no evidence of a timing advantage Frontiers of Finance January 2005

  10. Determinants of Shelf Use • Low bid-ask spread • High σ daily stock returns • Market-to-book not related • NYSE more likely • Large firms that are more highly levered Frontiers of Finance January 2005

  11. Multivariate Analysis of Costs of Unallocated Shelves (Independent variable = Combined CAR) • Strong results • Positive relation for market-to-book • Negative relation for free cash flow • Unexpected results? • Positive relation for NYSE • Information asymmetry insignificant • Positive and very significant relation for turnover Frontiers of Finance January 2005

  12. Multivariate Analysis of Benefits of Unallocated Shelf (Gross Spread Heckman Model) • Gross spreads are lower for unallocated shelf Frontiers of Finance January 2005

  13. Why doesn’t everybody use it? • When should firms use unallocated shelf? • What kind of firms should use unallocated shelf? • When a firm registers unallocated shelf, it retains the option on what type of security to issue. Does this option have value? • Are their difference market reactions depending on what types of securities the firm ultimately issues off of an unallocated shelf? • What role does exchange listing play? • Does the firms securities issuing history make a difference? • What about risk? Frontiers of Finance January 2005

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