The Effect of Management's Choice between Negotiated and Competitive Equity Offerings on Shareholder Wealth

Abstract

This paper investigates the effect on shareholder wealth of two events that change management's choice between negotiated and competitive underwritten equity offerings. These two events are the suspension and termination of suspension of Rule 50. (This rule is based on the Public Utility Holding Company Act of 1935 and requires certain utilities to use the competitive method.) The results indicate that the shareholders of the affected utilities experience an abnormal negative return on the announcement of the suspension of Rule 50, and an abnormal positive return on the announcement of the termination of suspension. This evidence is consistent with the joint hypothesis: (i) competitive offerings are less costly than negotiated offerings, and (ii) manager-shareholder agency costs are a determinant of the corporate choice between these two methods of raising equity.