Do shareholder rights influence the direct costs of issuing seasoned equity?

  • Don M. Autore
  • Jeffrey Hobbs
  • Tunde Kovacs
  • Vivek Singh
Original Research


We test the hypothesis that underwriters set higher gross spreads and deeper offer price discounts in seasoned equity offers of firms exhibiting weak shareholder rights as compensation for increased reputational risk and legal liability. Alternatively, if market participants are fully aware of the risks related to weak shareholder rights and efficiently price them, then underwriters arguably do not need to adjust issuance costs for firms with weak governance. Our results indicate that, on average, shareholder rights and direct issue costs are unrelated, supporting an efficient pricing view. However, upon closer examination, we find that underwriters charge higher gross spreads when the issuing firm has either an extremely low level of shareholder rights or a substantially lower level than expected, which are likely the cases in which the underwriter’s reputational risk is highest.


Shareholder rights Anti-takeover provisions Investment banks Seasoned equity offers Gross underwriter spreads Offer price discounts 

JEL Classification

G32 G34 


  1. Altinkilic O, Hansen R (2003) The discounting and underpricing in seasoned equity offers. J Financ Econ 69(2):285–323Google Scholar
  2. Autore D, Kovacs T, Sharma V (2009) Do analyst recommendations reflect shareholder rights? J Bank Financ 33(2):193–202Google Scholar
  3. Bebchuk L, Cohen A, Ferrell A (2009) What matters in corporate governance? Rev Financ Stud 22(2):783–827Google Scholar
  4. Becker-Blease J, Irani A (2008) Do corporate governance attributes affect adverse selection costs? Evidence from seasoned equity offerings. Rev Quant Financ Account 30(3):281–296Google Scholar
  5. Boone A, Field L, Karpoff J, Raheja C (2007) The determinants of corporate board size and composition: an empirical analysis. J Financ Econ 85(1):66–101Google Scholar
  6. Booth J, Smith R (1986) Capital raising, underwriting and certification process. J Financ Econ 15(1–2):261–281Google Scholar
  7. Butler A, Grullon G, Weston J (2005) Stock market liquidity and the cost of issuing equity. J Financ Quant Anal 40(2):331–348Google Scholar
  8. Cai C, Keasey K, Short H (2006) Corporate governance and information efficiency in security markets. Eur Financ Manag 12(5):763–787Google Scholar
  9. Chava S, Livdan D, Purnanandam A (2009) Do shareholder rights affect the cost of bank loans? Rev Financ Stud 22(8):2973–3004Google Scholar
  10. Cheng A, Collins D, Hunang H (2006) Shareholder rights, financial disclosure, and the cost of equity capital. Rev Quant Financ Account 27(2):175–204Google Scholar
  11. Chi J (2005) Understanding the endogeneity between firm value and shareholder rights. Financ Manag 34(4):65–76Google Scholar
  12. Chua C, Eun C, Lai S (2007) Corporate valuation around the world: the effects of governance, growth, and openness. J Bank Financ 31(1):35–56Google Scholar
  13. Core J, Guay W, Rusticus T (2006) Does weak governance cause weak stock returns? An examination of firm operating performance and investors’ expectations. J Financ 61(2):655–687Google Scholar
  14. Cornett M, Marcus A, Saunders A, Tehranian H (2007) The impact of institutional ownership on corporate operating performance. J Bank Financ 31(6):1771–1794Google Scholar
  15. Corwin S (2003) The determinants of underpricing for seasoned equity offers. J Financ 58(5):2249–2279Google Scholar
  16. Cremers M, Nair V (2005) Governance mechanisms and equity prices. J Financ 60(6):2859–2894Google Scholar
  17. Demsetz H, Lehn K (1985) The structure of corporate ownership: causes and consequences. J Polit Econ 93(6):1155–1177Google Scholar
  18. Demsetz H, Villalonga B (2001) Ownership structure and corporate performance. J Corp Financ 7(3):209–233Google Scholar
  19. Ferreira M, Laux P (2007) Corporate governance, idiosyncratic risk, and information flow. J Financ 62(2):951–989Google Scholar
  20. Florackis C, Ozkan A (2009) The impact of managerial entrenchment on agency costs: an empirical investigation using UK panel data. Eur Financ Manag 15(3):497–528Google Scholar
  21. Gompers P, Ishii J, Metrick A (2003) Corporate governance and equity prices. Q J Econ 118(1):107–155Google Scholar
  22. Hermalin B, Weisbach M (2003) Boards of directors as an endogenously determined institution: a survey of economic literature. Econ Policy Rev 9(1):7–26Google Scholar
  23. Hillier D, McColgan P (2006) An analysis of changes in board structure during corporate governance reforms. Eur Financ Manag 12(4):575–607Google Scholar
  24. Himmelberg C, Hubbard R, Palia D (1999) Understanding the determinants of managerial ownership and the link between ownership and performance. J Financ Econ 53(3):353–384Google Scholar
  25. Holm C, Schøler F (2010) Reduction of asymmetric information through corporate governance mechanisms—the Importance of ownership dispersion and exposure toward the international capital market. Corp Gov Int Rev 18(1):32–47Google Scholar
  26. Jiraporn P, Kim Y, Davidson W, Singh M (2006) Corporate governance, shareholder rights and firm diversification: an empirical analysis. J Bank Financ 30(3):947–963Google Scholar
  27. Johnson S, Moorman T, Sorescu S (2009) A reexamination of corporate governance and equity prices. Rev Financ Stud 22(11):4753–4786Google Scholar
  28. Kanagaretnam K, Lobo G, Whalen D (2007) Does good corporate governance reduce information asymmetry around quarterly earnings announcements? J Account Public Policy 26(10):497–522Google Scholar
  29. Kang S, Kumar P, Lee H (2006) Agency and corporate investment: the role of executive compensation and corporate governance. J Bus 79(3):1127–1147Google Scholar
  30. Kim E, Purnanandam A (2014) Seasoned equity offerings, corporate governance, and investments. Rev Financ 18(3):1023–1057Google Scholar
  31. Kim K, Shin H (2004) The puzzling increase in the underpricing of seasoned equity offerings. Financ Rev 39(3):343–365Google Scholar
  32. Klock M, Mansi S, Maxwell W (2005) Does corporate governance matter to bondholders? J Financ Quant Anal 40(4):693–719Google Scholar
  33. Knyazeva D (2008) Corporate governance, analyst following, and firm behavior. Working paper, University of RochesterGoogle Scholar
  34. Lee K, Lee C (2009) Cash holdings, corporate governance structure and firm valuation. Rev Pac Basin Financ Mark Policies 12(3):475–508Google Scholar
  35. Lehn K, Patro S, Zhao M (2007) Governance indices and valuation: which causes which? J Corp Financ 13(5):907–928Google Scholar
  36. Lehn K, Patro S, Zhao M (2009) Determinants of the size and structure of corporate boards: 1935–2000. Financ Manag 38(4):747–780Google Scholar
  37. Lin J, Ulupinar B (2013) Underwriting fees and shareholders rights. J Bus Financ Account 40(9–10):1276–1303Google Scholar
  38. Luo Q, Hachiya T (2005) Corporate governance, cash holdings, and firm value: evidence from Japan. Pac Basin Financ Mark Policies 8(4):613–636Google Scholar
  39. Mola S, Loughran T (2004) Discounting and clustering in seasoned equity offering prices. J Financ Quant Anal 39(1):1–23Google Scholar
  40. Pawlina G, Renneboog L (2005) Is investment-cash flow sensitivity caused by agency costs or asymmetric information? Evidence from the UK. Eur Financ Manag 11(40):483–513Google Scholar
  41. Peasnell K, Pope P, Young S (2005) Board monitoring and earnings management: do outside directors influence abnormal accruals. J Bus Financ Account 32(7–8):1311–1346Google Scholar
  42. Perotti E, Thadden E (2003) Strategic transparency and informed trading: will capital market integration force convergence of corporate governance? J Financ Quant Anal 38(1):61–85Google Scholar
  43. Shleifer A, Vishny R (1997) A survey of corporate governance. J Financ 52(2):737–783Google Scholar
  44. Smith C, Watts R (1992) The investment opportunity set and corporate financing, dividend, and compensation policies. J Financ Econ 32(3):263–292Google Scholar
  45. Tinic S (1988) Anatomy of initial public offerings of common stock. J Financ 43(4):789–822Google Scholar
  46. Wruck K (1993) Stock-based incentives and investment decisions. J Account Econ 16(1–3):373–380Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Finance, College of BusinessFlorida State UniversityTallahasseeUSA
  2. 2.Department of Finance, Banking and Insurance, Walker College of BusinessAppalachian State UniversityBooneUSA
  3. 3.Management Department, The Robert J. Manning School of BusinessUniversity of Massachusetts-LowellLowellUSA
  4. 4.Department of Accounting and Finance, College of BusinessUniversity of Michigan-DearbornDearbornUSA

Personalised recommendations