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
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
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:
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
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
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secondary distribution stock
secondary public offering
secondary offering stock effect
registered secondary offering dilution
seasoned issues dilution