Seasoned Equity Offerings: Quality of Accounting Information and Expected Flotation Costs
Journal of Financial Economics, 92, 443- 469, March 2009
Gemma Lee, Ph.D. Department of Finance
Ronald W. Masulis
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) 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, we show that poor accounting information quality is associated with higher flotation costs (SEOs) 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.