The Proportion Underwritten and the Reaction to Share Issues: Uk Tests of the Eckbo-masulis Theory

The Eckbo-Masulis (1992) theory predicts that a seasoned offer is more likely to be underwritten the higher the proportion of shares expected to be sold to new investors, and further predicts a negative relation between abnormal returns on announcement and sales to new investors. The evidence in this paper does not support these predictions. The proportion underwritten is determined primarily by the proportion of shares sold before the issue is announced, not by the proportion sold to new investors. The event study reveals a clear negative relation between abnormal returns and depth of offer price discount but not sales to new investors. Acknowledgements The author thanks Elizabeth McDiarmid and Kevin Acton for careful research assistance, and Extel Financial Ltd for allowing generous access to their database of share issue prospectuses. The support of the Economic and Social Research Council (UK) and of Walter Scott & Partners is gratefully acknowledged. The research was partly funded by ESRC number: R000221760.