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Q: Secondary public offering of a stock ( Answered,   1 Comment )
Subject: Secondary public offering of a stock
Category: Business and Money > Finance
Asked by: job1-ga
List Price: $100.00
Posted: 20 May 2006 08:10 PDT
Expires: 19 Jun 2006 08:10 PDT
Question ID: 730709
How can I estimate the stock price discount that might be caused by an
announced secondary public offering of the stock?

Request for Question Clarification by pafalafa-ga on 20 May 2006 09:49 PDT

If you're looking for a process to do this, I would suggest simply
identifying a set of companies that have a recent history of secondary
offerings, and tracking the prices announced for the secondary
offering, compared with the current price of the stock.

For instance, Google priced its secondary offering at $295, at a time
when its shares sold for $303.

The companies can be a mix of offerings, or can be companies in a
particular sector, depending on your interests.

Once you had a good set of information, you could just take an average
across all the stocks, to get an estimated discount.

Is that the sort of "How to" information you're seeking?

If not, can you let us know in a bit more detail what it is you're after?



Clarification of Question by job1-ga on 22 May 2006 08:20 PDT
I am looking for complted studies on the subject, or a theorectical
treatment of the issues involved.
Subject: Re: Secondary public offering of a stock
Answered By: leapinglizard-ga on 31 May 2006 19:24 PDT
Dear job1,

An authoritative study of secondary offerings was written by Mikkelson
and Partch in 1986. Although I have not been able to locate a PDF version
of this paper online, Google has cached a text version at the following
address. Textual errors and formatting peculiarities in this version
result from the probabilistic nature of the optical character recognition
(OCR) process.

    This paper investigates the stock price effects and costs
    associated with large block sales of common stock in the form
    of secondary distributions. We focus on secondary distributions
    because they are offerings of substantial size and are not
    associated with a change in the firm?s assets or capital
    structure. Thus, the price effects and costs of the sale of
    shares can be measured in the absence of confounding changes in
    assets or capital structure.

    This study is closely related to Scholes? (1972) investigation
    of secondary distributions. Our study differs from Scholes?
    in that we examine returns around the earliest announcement date
    as well as around the offering date.


    We find that secondary offerings are associated with a significant
    decrease in share price. The average two-day abnormal stock return
    at the earliest public disclosure of the offerings is - 1.96% for
    non-registered secondaries and - 2.87% for registered secondaries.

Mikkelson, W. H. and Partch, M. M.: Stock Price Effects and Costs of
Secondary Distributions

Mikkelson and Partch refer to an important 1972 paper by Scholes. You
may download a PDF version of this paper from the following location.

Scholes, M. S.: The Market for Securities: Substitution Versus Price
Pressure and the Effects of Information on Share Prices

Schwert has written a PowerPoint summary of the Mikkelson and Partch

    What Happens When the Sale Is Announced? (Table 5)

        Day -1: -1.31% (R) & -.40% (U)

        Day 0: -1.56% (R) & -.40% (U)

        Day 1: .09% (R) & -1.56% (U)

    * unregistered secondaries (U) typically are disclosed and
    distributed after the close of trading on day 0

    * no price rebound later

        * reflecting temporary price pressure

    What Happens When Shares Are Distributed? (Table 6)

    * Registered secondaries are distributed well after the

    * No stock price effect when trades occur
        * just when the intention to sell is announced

    * No price rebound later reflecting temporary price pressure

    Does It Matter Who Is Selling?  (Table 10 -- registered)

    * Largest price effect for insiders (-3.4%; t=-8.5)
        * -2.6% for other sellers, still significant

    Largest price effect for largest sales: 19% of stock (-3.9%; t=-7)
        * -2% (t=-4.5) for smallest sales

    It is not good news that a large holder has decided to sell a
    block of stock
        * and hasn't found a large buyer to replace him

G. William Schwert: FIN 411: Secondary Distributions

A 1986 paper by Hess and Bhagat looks into the question of how the size
of a secondary offering affects the stock dilution.

    When an exchange-listed corporation announces a new issue of
    common stock, share price declines. This study investigates
    whether these price falls are associated with the size of the
    issue relative to the number of shares previously outstanding.

Hess, A. C. and Bhagat, S.: Size Effects of Seasoned Stock Issues:
Empirical Evidence

Hess and Bhagat cite Asquith and Mullins' paper on offering dilution.

    This study investigates the effect on stock prices of seasoned
    equity offerings. The results demonstrate that the announcement
    of equity offerings reduces stock prices significantly.  For
    industrial issues, regression results indicate that announcement
    day price reduction is significantly and negatively related
    to the size of the equity offering. The results appear not to
    be explained by changes in capital structure associated with
    the equity offerings. The findings are consistent both with the
    hypothesis that equity issues are viewed by investors as negative
    signals and with the hypothesis that there is a downward sloping
    demand for a firm?s shares.

Asquith, P. and Mullins, D. W.: Equity Issues and Offering Dilution

A neat summary of the Asquith and Mullins paper is available at the
following address.

    This is largely an event study paper that looks at 531 offerings
    (both primary as well as secondary offerings) from 1963-1981. As
    predicted by many models (agency cost, pecking order, and
    information asymmetry) the offerings were met with negative
    reactions. [Note: primary transactions affect capital structure
    where secondary offerings would not.] Overall 2 day reaction
    was -2.7% (-3% for primary issues, -2% for secondary issues.)


    More than 80% of the issues caused decreases in value of existing
    stock and more than 6% of the issues caused dilution of over
    100%. That is the firm is worth less AFTER issuing more equity.

    Further the larger the issue the larger the price drop.

FinanceProfessor: Summaries: Equity Issues and Offering Dilution

It has been an interesting challenge to work on your question. If you
have any concerns about the accuracy or completeness of my research,
please advise me through a Clarification Request and allow me the
opportunity to fully meet your needs before you rate this answer.



Search strategy:

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Subject: Re: Secondary public offering of a stock
From: pafalafa-ga on 01 Jun 2006 03:53 PDT
Nice job, ll-ga.  This was a tough question.


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