Underwriting Costs and Market Value Effects of Raising Bank Capital

This study examines the direct (out-of-pocket) flotation costs of new capital issues by bank holding companies between 1980 and 1986 and the total costs including any market effects of security issuance. A regression model is developed that relates the direct selling costs to the type of security be...

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Bibliographic Details
Published in:Managerial finance 1997-09, Vol.23 (9), p.55-68
Main Authors: Wansley, James W, Dhillon, Upinder S
Format: Article
Language:English
Subjects:
Abnormal returns
Bank acquisitions & mergers
Bank holding companies
Banking industry
Capital
Capital structure
Compensation
Costs
Direct selling
Equity
Flotation
Hypotheses
Preferred stock
Reserve requirements
Sales
Statistics
Stock prices
Studies
Underwriting
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Summary:This study examines the direct (out-of-pocket) flotation costs of new capital issues by bank holding companies between 1980 and 1986 and the total costs including any market effects of security issuance. A regression model is developed that relates the direct selling costs to the type of security being issued, the exchange on which the parent bank holding company is traded, information specific to the issue, and information specific to the firm. The model is highly significant, explaining over 80 percent of the variation in issuing costs. These direct costs, however, are small for equity issues when compared to information effects (stock price responses). When these costs are included, the costs to bank holding companies of issuing equity increase substantially and the direct costs of issuing preferred and debt are, generally, more than offset by positive stock price effects.
ISSN:0307-4358
1758-7743
DOI:10.1108/eb018647