Unallocated Shelf Registration: Why Doesn

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Unallocated Shelf Registration Why Doesnt
Everybody Use it?
Jennifer E. Bethel Babson College Laurie
Krigman Babson College
Frontiers of Finance Conference January 2005
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Deregulation of the offering registration process
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Questions

• Has deregulation of the offering registration
  process benefited any firms?
• Why do only a fraction of eligible firms take
  advantage of this streamlined process?
• What are the costs and benefits of registering
  and issuing equity using unallocated shelf
  registration?
• What types of firms benefit from unallocated
  shelf registration?
• Has deregulation been successful?

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Other work on shelf registration

• Market overhang from allocated shelf
  registrations in the early 1980s
• Theoretically, price declines more severe than
  for SEOs
• Empirically, no market overhang
• Bhagat, Marr, and Thompson (1985), Jensen,
  Hudson, and Sullivan (1995), Moore, Peterson, and
  Peterson (1986)
• Selection bias? Denis (1993)
• Recent studies
• Heron and Lie (2004) 256 allocated and
  unallocated shelves 1980-1998
• Shelf registration conveys less unfavorable
  information than traditional SEO
• Shelf users are more leveraged and have low cash
  flow
• Shelf users demonstrate little timing ability
• Autore, Kumar and Shone (2004) Allocated shelf
  revival post-2001
• Shelf registration is lower cost than traditional
  SEO
• Shelf issuers take advantage of timing ability

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Costs of shelf registration (and issuing equity)

• Transactions costs, especially costs arising from
  information asymmetry, cause stock prices to fall
  when SEOs are announced.
• Shelf registration may exacerbate price drop due
  to uncertainty surrounding amount and timing of
  potential common equity offers

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Benefits of shelf registration

• Experience lower direct issuance costs
• Gross Spreads
• SEO Discounting
• Avoid regulatory uncertainty and delays
• Exploit short-term pricing opportunities

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Sample

• Prospectuses registered between 10/29/92 and
  12/31/01.
• No REITS, financial services firms, and ADRs in
  the sample.

Traditional Registrations
Unallocated Shelf Registrations

• Limited to issuers that could have used shelf.
• Issuers registered 341 billion in 2,608
  offerings (131 million/offering).

• 438 issuers registered 680 billion on 722
  unallocated shelves (543 million/shelf)
• 226 issuers took equity down 373 times, for a
  total of 84 billion (225 million/offering)
• Takedowns total 1,368 billion
• 65 firms filed but never used shelves

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Firm characteristics

• Shelf compared to traditional SEO issuers
• Shelf are larger (assets and market cap)
• Shelf have higher leverage
• Shelf have lower book to market
• Shelf have higher ROE and ROA
• Shelf have higher NYSE listings

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Announcement Effects Market Overhang
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Cost of issuing common equity
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Benefits of shelves
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Probit model of registration choice

• Choice to use Shelf Registration is related to
• Information Asymmetry (?)
• Free Cash Flow (?)
• Firm Size ()
• Volatility ()
• Pseudo R-squared 55.7
• Control Variables exchange listing, turnover,
  firm size, leverage, volatility

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Cost Selection Model Results

• Market Reaction to Shelf Registration
• Information Asymmetry (?)
• Shelf Selection Lambda ()
• Market Reaction to Equity Takedowns
• Investment Opportunities ()
• Free Cash Flow (?)
• Gross Spread (?)
• Days in Registration ()
• Shelf Selection Lambda ()
• Control Variables exchange listing, turnover,
  shelf amount, dilution, proceeds, volatility,
  overnight offerings, price percentile

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Benefits Selection Model Results

• Gross Spread is significantly lower for shelf
  offerings controlling for the selection bias
• Days in Registration are significantly lower for
  shelf offerings
• No difference in pricing and timing ability for
  shelf issuers
• SEO Discount is same for shelf and tradition once
  firm and offer characteristics are controlled for
• Shelf issuers have no better timing ability than
  traditional issuers
• Benefits the SEC intended to confer have been
  realized

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Summary of results

• Shelf registration confers valuable benefits to
  firms.
• On average, unallocated shelf registration is low
  cost Firms experience no market overhang.
• This cost differs, however, among firms.
• Managers appear to select the registration
  procedure that minimizes their cost of issuing
  equity.
• Defection from predicted procedure is costly

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Conclusion

• Managers choose registration strategies to
  maximize valueShelf registration is valuable for
  some firms.
• The SEC succeeded in deregulating the equity
  issuance processbut only for certain (the
  right?) firms
• No need to worry about eligibility requirements