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

Frontiers of Finance January 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 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 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 Unallocated Shelf Traditional registration Average underwriting spread3.8%4.9% Average SEO discount2.1%2.6% Average size of offering$225 Million $131 Million Median market capitalization3 Billion592 Million LDT/TA28.3%12.3% σ daily stock return2.2%3.4% Market to book Free cash flow-to-assets % ROE10.81%9.36% Bid-ask spread0.55%1.50% List on NYSE80%31%

Frontiers of Finance January Cost of Issuance 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

Frontiers of Finance January Filling Announcement Return w i is the portion of the offering composed of that security t i 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 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 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 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 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 Multivariate Analysis of Benefits of Unallocated Shelf (Gross Spread Heckman Model) Gross spreads are lower for unallocated shelf

Frontiers of Finance January 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?