SEO Cost Differences between Europe and U.S.

Transcription

1 SEO Cost Differences between Europe and U.S. Svein Olav Krakstad * University of Stavanger May 12, 2013 * Address: University of Stavanger, NO-4036 Stavanger, Norway. Svein.O.Krakstad@uis.no. I would like to thank Ole Svein Krakstad, Aksel Mjøs, Peter Molnar, Randi Næs, Marius Sikveland, Bernt Arne Ødegaard and participants in various seminars and conferences for helpful comments. I am solely responsible for all remaining errors and omissions. 1

2 Abstract This paper investigates direct Seasoned Equity Offering (SEO) costs difference between Europe and U.S in the period from 1990 to We find that the direct cost for companies using the fully marketed offering method is approximately 50% higher in U.S. than in Europe, and for U.S. accelerated bookbuilt offerings direct costs are around 85% higher than European costs. The direct cost differences between Europe and U.S. decline with more proceeds for fully marketed offering, but the opposite is the case for accelerated bookbuilt offerings. Since accelerated bookbuilt offerings are cheaper in Europe (also when comparing it with fully marketed offerings), it seems likely that investment banks operating in U.S. want to hold on to the old fee structur. This paper concludes that strategic pricing occurs in U.S. while the European market is more competitive. However, if European companies register with Securities and Exchange Commission in U.S., they pay roughly 1.3% more in direct costs. Keywords: SEOs, Investment Banks, Fees, Underpricing, Bookbuilding JEL: G21, G24, G32 2

3 1 Introduction One of the main reasons of capital markets existence is to allocate capital efficiently to those investors with good investment opportunities. The U.S. market is based on free market principles such that capital should float freely with few restrictions. Competition and internationalization have made IPO and SEO techniques in different countries to converge, but the fees have not converged. There are large differences in direct costs (measured as percentage of proceeds) between U.S. and Europe. Since U.S. companies pay investment banks around 50% more for Initial Public Offering (IPO) and Seasoned Equity Offering (SEO) services than European companies, the U.S. market does not seem to be as efficient as European markets in terms of equity issuance costs. This paper investigates why there are direct cost differences between Europe and U.S. Figure 1 illustrates how large the differences between Europe and U.S have been from 1990 to Direct SEO costs in U.S. are found to be around 1.7% higher than in Europe for fully marketed offerings 1 and 2% for the accelerated bookbuilt offerings 2. The differences between Europe and U.S. is pretty stable from 1990 to 2011 (except from some Greek companies in 2010 and 2011 driving up the yearly average for European accelerated bookbuilt offerings). By analyzing the differences using regressions, we identify that European firms that register at the Securities and Exchange Commission (SEC) in U.S., pay on average 1.3% more than firms that do not register. In other words, the U.S. cost level seems to affect European firms that also issue seasoned equity in U.S. 1 Fully marketed offering is quite similar to the bookbuilt IPO process. Typically, the investment bank performs a road show and builds an order book, in which the issuer s management and the underwriter meet with institutional investors, analysts and securities sales personnel. Usually, the process takes 2-3 weeks. 2 Accelerated bookbuilt offerings are often performed within 48 hours. The investment bank quickly performs a bookbuilding process to some selected institutional investors without road show. 3

4 Figure 1: shows the development in gross spread fee (percent of proceeds) of fully marketed offerings (left) and accelerated bookbuilt offerings (right) from 1990 to Data from Dealogic. All events under 25 million USD2011 are deleted. IPOs are typically more studied than SEOs because IPOs occur more often (leading to more observations), but SEOs raise in total more equity than IPOs (see Bortolotti et al. (2008)). A reason why no one has looked at the SEO direct cost differences between European and U.S., is probably related to data availability. European companies do not have to publish the gross spread fee, and therefore many companies do not disclose the fee publicly. However, we have around 500 observations, and this amount of observations is sufficient to obtain statistically significant results. Data for U.S. SEOs have been available to investigate strategic pricing issues, and the reason why it is not done, could be related to the lack of clustering around a level for direct cost fees in U.S. Sorting our sample on year, there seems to be no clustering pattern in Europe and U.S. In IPOs there is a lot of uncertainty regarding the issue price and legal obligations, but for SEOs much of this uncertainty is revealed. This paper provides new insight regarding the differences between Europe and U.S. We also have the largest European sample used in the literature. 4

5 Chen and Ritter (2000) find that in U.S. 90% of their investigated IPO transactions which varied between 20 and 80 million USD, cost exactly 7.0% of proceeds. They argue that the concentration of spreads at 7% is consistent with strategic pricing on the part of investment banks. Hansen (2001) argues against this implicit collusion or strategic pricing. According to him, the seven percent solution suggests either strategic pricing by investment banks or the 7% contract is an efficient innovation that better suits IPOs. He finds that the U.S. IPO market is not highly concentrated, has strong market entry and no abnormal return of the seven percent solution relative to other IPOs. Torstila (2003) argues that the clustering of IPO costs is not evidence that an implicit collusion exists in U.S. because the same pattern can be found in other countries, but at lower levels. In the period between 1998 and 2007, Abrahamson et al. (2011) find that the direct cost for issuing IPOs in U.S. is clustering around 7%. In Europe the fee is roughly 4%, but there is no clustering pattern. They try to explain the differences by looking at differences in legal costs, retail offerings, litigation risk, analysts and underpricing, but they find no evidence supporting these suggested explanations. However, they argue that the European IPO market is more competitive than the U.S. market. The authors conclude that strategic pricing happens in U.S. but not in Europe. Abrahamson et al. (2011) point out that in the 1990s companies on both sides of the Atlantic Ocean have used different issuing methods, but European companies started to issue equity (IPO) from around 1999 with the same bookbuilding method as the U.S. companies. A commonly used explanation earlier was that IPOs in Europe use on average less time, and European companies used the cheaper fixed price method. Today, the underwriting methods are more similar. In this paper, SEOs performed by accelerated bookbuilt and fully marketed method are investigated. Other issuing types are excluded due to data availabil- 5

6 ity. By using these classifications, we are able to compare issues between the two regions. Usually, accelerated bookbuilt offerings are done within 48 hours, but the fully marketed offering method use around 2 3 weeks because the underwriter has to build the order book by marketing the offer. Bortolotti et al. (2008) document that more and more companies worldwide do SEOs by accelerated bookbuilt method, and they conclude that this represents a shift towards an auction model for SEOs as predicted. According to them, more companies choose accelerated bookbuilt offerings because these deals have lower gross spread fee and underpricing. Kim et al. (2010) find that gross spread fee and underpricing could be regarded as complements since the correlation between them is negative. The underwriter will profit both from underpricing and direct costs. The underpricing is determined at the same time as the underwriting fee is negotiated. While the direct cost differences reduces with higher proceeds for fully marketed offerings. The direct costs for offerings under 100 million USD is 25% more expensive in U.S. than Europe. This difference increases with size. For offerings over 500 million USD these transactions are around 150% more expensive. Since we are not able to explain why there are so large differences, it seems reasonable to assume that there is an implicit collusion between the investment banks operating in U.S. After controlling for deal and company specifications, we find that U.S. companies pay around 1.6% and 1.8% more for accelerated bookbuilt and fully marketed offering, respectively. The same investment banks charge higher fees in U.S. than in Europe. It is puzzling that U.S. companies accept these higher fees. It could be because of signaling effects. If firms do not choose the largest investment banks as managers, the market would interpret this as a bad signal which lowers the market value of these companies. It might be easier in Europe to deviate from the implicit equilibrium because of political regulations. For example in Germany, each company must 6

7 use at least one German bank. Using banks that the companies have a special lending relationship with could lead to lower asymmetric information costs. The distance from the best investment banks and the second bests seems to be shorter in Europe. It is not possible to test whether the differences come from signaling or asymmetric information costs, but it could help us to understand the differences. The remainder of this paper is organized as follows: Section 2 describes the data, Section 3 proposes explanations for why differences between the Europe an and U.S. market might exist, results are presented in Section 4 and Section 5 concludes. 2 Data We use a database from Dealogic, which is a U.K. based company that has collected European IPO and SEO transactions data from 1980 and U.S. transaction data from The database contains detail information about each transaction. Gao and Ritter (2010) compare the Dealogic s classification of SEO types with Thomson Financial Securities Data Company s (SDC) classification, and Dealogic s classifications is found to be more accurate. 2.1 Restriction imposed Our dataset consists of 14, 352 observations from 1990 to 2011 of 19 European countries and U.S. for equity issues over 25 million USD 3. Table 7 in Appendix shows which countries that are included and the number of observations in each country. 4 The 25 million USD limit is imposed because compensation for smaller offerings 3 Without this restriction our sample has 24, 512 observations. 4 Table 9 in Appendix tells us something about the accumulated deal value of all offerings, and Table 10 in Appendix shows the average deal value for each country in two time periods. 7

8 is higher due to scale diseconomies. Abrahamson et al. (2011) and Chen and Ritter (2000) use this restriction in similar research. Following Gao and Ritter (2010), we exclude ADRs 5, best efforts 6, U.S. companies that do not register at SEC (the commonly excluded transactions are: private offerings to a limited number of persons or institutions, offerings of limited size, Intrastate offerings, securities of municipal, state and federal governments.) 7, unit offers (often includes warrants), close-end funds (mutual funds with high leverage), Real Estate Investment Trusts (REITs) are excluded due to their high leverage and lower underpricing than typical (see Goodwin (2010)) and pure secondary offers 8 because these transactions have special characteristics. All these restrictions reduce our sample to 12, 624 observations. The dataset is sorted on deal nationality which is the same as issuer s nationality. 2.2 Overview of the SEO types used There is an increasing use of accelerated bookbuilt offerings worldwide from The reason for the increase use of the accelerated bookbuilt offerings are because the gross spread fee and the discount are lower for these offerings compared to fully marketed offerings (Bortolotti et al. (2008)). Our data also confirms this trend, but there are some differences when dividing the data into three subgroups. From 2006, around 50% of U.S. and 65% of European companies issue equity with accelerated bookbuilt offerings (see Figure 2). Fully marketed offerings are 5 An American depositart receipt (ADR) is a traded security of a non-u.s. company s stock that pays dividends in USD. An investment bank usually buys the stock and form a security denoted in USD. Since these securites are special, we exclude all ADR transactions. 6 Best efforts are primarily used by companies with high risk, and typically these transactions are unseasoned offerings. 7 We also exclude U.S. offers Rule 144A. After the non-sec restrictions (deleting 1.5% of the U.S. sample), Rule 144A deletes only one observation. 8 In these transactions all shares are sold by existing shareholders. These pure secondary offers are deleted because they are special cases of SEOs with special characteristics. Gao and Ritter (2010) argue that these transactions are similar to large sales (block trades) in the open market. 8

9 Figure 2: shows the development in the use of four different SEO types (rights issue, bought deals, fully marketed and accelerated bookbuilt offerings from 1990 to 2011 in U.S. (left) and Europe (right) The relative share is all observations of a SEO type divided by all observations of these four different SEO types in each year. Data from Dealogic. All events under 25 million USD2011 are deleted. decreasing in both markets. Rights issue 9 is not important in U.S., but in Europe this type of issue is still important. Around 25% of these transactions are rights issues. Table 3 reveals that if European companies choose the accelerated method instead of fully marketed method, they get lower gross spread fee by approximately 30% but U.S. companies get only 15% discount. The gross spread fee differences between Europe and U.S. for fully marketed offerings declines with larger proceeds, but for accelerated bookbuilt offerings the differences increases. These differences can help to explain why the accelerated bookbuilt offerings are more popular in Europe. 9 When companies issue equity through the rights issue, typically a right to buy stocks to the issue price is given to each investor who holds the stock before a specified date (ex. rights date). This right can be traded on the stock exchange for a number of days after the ex. rights day. It is called standby rights issue when the issue is syndicated (guaranteed) by investment banks and/or investors. 9

10 2.3 Direct costs Before the rise of the accelerated bookbuilt offerings in the 2000s, the U.S. market was dominated by fully marketed offerings (Gao and Ritter (2010) or see Figure 2). Therefore, previous research that addresses the SEO costs, does not typically split the firm commitment offerings into bought deals 10, accelerated bookbuilt and fully marketed offerings. Dealogic defines the gross spread fee to be equal to the management fee (portion of gross fees paid to the investment managers for due diligence efforts) plus underwriting fee (underwriting fee for the head tranche 11 only) plus selling concessions (amount paid to the syndicate members). A problem with our dataset is that European companies do not have to publish the gross spread fee. In the full European sample, only 15% of all transactions have been published with the gross spread fee. In U.S., every company have to publish this fee, and in our sample 80% of the U.S. observations have a gross spread fee. In fully marketed offering transactions, around 70% of the European companies publish the gross spread fee. The rights issue, bought deals, and accelerated bookbuilt have much lower fraction (around 10% 15%) in the European sample. In U.S. almost all accelerated bookbuilt and fully marketed offering transactions have a gross spread fee. We do not know the reason why some companies choose to publish and why someone do not. It could be endogenous problems related to corporate governance issues; better companies might report the gross spread fee. However, we are not able to take account for this in our analysis. 10 In bought deals investment banks first compete in order to be the underwriter for the issue. The winner is normally the underwriter with the highest price. A bought deal occurs when an underwriter purchases a number of stocks with an agreed price from an issuer before a prospectus is filed. Since the issuer does not have to worry about the financing risk, the stocks are usually more discounted for bought deals than fully marketed deals. Normally, the bought deals are done in 24 hours. If there is unsold stocks, the underwriter have to buy them. 11 An offering can be split into many parts (i.e. tranches) for example when raising equity in different markets. 10

11 Our restricted U.S. sample contains nine rights issues, and therefore a comparison with Europe does not make much sense. After restrictions we have 36 European bought deal observations. Since few comparable observations are available for bought deals and rights issues, we do not investigate differences in these two SEO types. The development of gross spread fee of rights issues and bought deals in both regions can be found in Figure 8 in Appendix. The European sample contains 137 accelerated bookbuilt offering observations on direct costs. Due to this method s importance today, focus is also on these transactions. Hence, we only use observations for accelerated bookbuilt and fully marketed offerings for investigation of gross spread cost differences between Europe and U.S. Summary statitics give an overview of the data in Table 12 and Table 13 in Appendix. The number of observations, average gross spread fee, underpricing (=(offer price - price the day before announcement (P))/P), proceeds, market value of equity, and percent of equity issued are shown in Table As this table indicates, the gross spread fee is higher in U.S. than in Europe. Figure 1 and Figure 1 show the development in the gross spread fee for the fully marketed and accelerated bookbuilt offerings in Europe and U.S. from 1990 to ,14 12 All gross spread fee averages are shown in Table 8 in Appendix for each country and for three periods. 13 In 2008 the average gross spread fee is only 2.1% based on 2 observations: Hsbc Infrastructure Company Limited (U.K., Investment company, Gross spread fee = 1.25%, Underpricing = 15.61%) and Central European Distribution Corp (Poland, Alcohol company, Gross spread fee = 3.00%, Underpricing = 2.48%). 14 Many Greek companies in 2010 and 2011 issued equity and the companies had to pay high gross spread fee. In addition the U.K. companies that issued equity, had to pay high gross spread fee. In 1999 the gross spread fee average in U.S. is 1.7%, which is the average fee of Adelphia Communications Corp, Eaton Corp and Mosaix Inc. 11

12 Table 1: shows average gross spread fee, underpricing, proceeds (million USD), market value of equity (million USD), and percent of current equity issued for European and U.S. SEO companies between 1990 and 2011 and two subperiods. Proceeds are defined as the equity raised, Market value is the market value of equity and Percent of Equity measures the number of new stocks relative to the initial number of stocks in the company. European fully marketed offerings Obs Obs Obs Gross Spread Fee Underpricing Proceeds E E E+08 Market Value E E E+09 Percent of Equity U.S. fully marketed offerings Obs Obs Obs Gross Spread Fee Underpricing Proceeds E E E+08 Market Value E E E+09 Percent of Equity European acclerated bookbuilt offerings Obs Obs Obs Gross Spread Fee Underpricing Proceeds E E E+08 Market Value E E E+09 Percent of Equity U.S. acclerated bookbuilt offerings Obs Obs Obs Gross Spread Fee Underpricing Proceeds E E E+08 Market Value E E E+09 Percent of Equity

13 2.4 Clustering of Fees Clustering of fees are known from the IPO literature (cf. Abrahamson et al. (2011)). Kim et al. (2010) analyze industrial stocks for American firm commitment issues in the period between 1970 and They find that the underwriting fee has declined from 7.7% in the beginning of the sample to 4.7% in the end of the sample. They also find much clustering around 5%. Figure 3 and Figure 4 shows that clustering of fees are not normal in the SEO market, although there are many fees that is exactly a round number. However, looking at scattering plots, see Figure 5 and Figure and 6, there seems not to be clustering of fees in Europe or U.S. If we group, however, all years together the most frequent observation is 5%, and in that sense our data confirms what Kim et al. (2010) find. 13

14 Figure 3: is a histogram of the gross spread fee observations for fully marketed offerings from 1990 to 2011 in Europe (left) and U.S. (right). Data from Dealogic. All events under 25 million USD2011 are deleted. Figure 4: is a histogram of the gross spread fee observations for accelerated bookbuilt offerings from 1990 to 2011 in Europe (left) and U.S. (right). Data from Dealogic. All events under 25 million USD2011 are deleted. 14

15 Figure 5: is a scatter plot of the gross spread fee observations for fully marketed offerings from 1990 to 2011 in Europe (left) and U.S. (right). Data from Dealogic. All events under 25 million USD2011 are deleted. Figure 6: is a scatter plot of the gross spread fee observations for fully marketed offerings from 1990 to 2011 in Europe (left) and U.S. (right). Data from Dealogic. All events under 25 million USD2011 are deleted. 15

16 2.5 Industries The distribution of industries that choose accelerated bookbuilt and fully marketed offerings, are shown in Table 2. Table 2: shows which which industries that choose fully marketed offering (FMO) and accelerated bookbuilt offering (ABO) in the period between 1990 and 2011 for both Europe and U.S. Difference is equal to fraction FMO miuns fraction ABO. Europe U.S. FMO ABO Differance FMO ABO Differance d_finance d_bank d_retail d_dininglodging d_healthcare d_metalsteel d_constructionbuilding d_autotruck d_utilityenergy d_insurance d_consumerproducts d_aerospace d_textile d_foodbeverage d_agribusiness d_machinery d_forestrypaper d_transportation d_realestateproperty d_mining d_closedendfunds d_holdingcompanies d_telecommunications d_computerselectronics d_professionalservices d_publishing d_chemicals d_oilgas d_leisurerecreation Obs

17 3 Why do cost differences exist? This section investigates why differences between Europe and U.S. can exist. 3.1 Underpricing More discounted stocks could make manager(s) to accept lower gross spread fee as they are able to sell more stocks because of the lower issue price. U.S. stocks are marginally more discounted than European stocks for both accelerated bookbuilt and fully marketed offerings (see Table 1). Given that the gross spread fees favor Europe, we would expect that U.S. companies have less discounted stocks. It can be argued that the lower the gross spread fee is, the more discounted the stocks are because increasing the discount is another way for investment banks to earn additional payment. Therefore, underpricing should not help to explain why direct costs are higher in U.S. Figure 7 shows the development in underpricing from 1990 to 2011 for fully marketed offerings and accelerated bookbuilt offerings Size Differences In our sample, the European fully marketed offering companies are large than the same U.S. companies (see Table 1). According to Gao and Ritter (2010), firms with on average less elastic demand function, are more likely to be willing to pay the underwriters for creating demand. Smaller firms have often more inelastic demand function, and these firms might on average choose fully marketed offerings. Gao and Ritter (2010) point out that the larger the size of offer is, the larger should the probability for firms paying for demand, be. The underwriter might try to take additional payment if the offer size is larger. This argument does not seem 15 Similar underpricing figures are shown in the Appendix for rights issues and bought deals (see Table?? and Table??). 17

18 Figure 7: shows underpricing development of fully marketed offerings (left) and accelerated bookbuilt offerings (right) from 1990 to Underpricing = (offer price - price the day before announcement (P))/P. Data from Dealogic. Events under 25 million USD2011 are deleted. to be valid in order to explain gross spread fee differences because European companies raise on average more equity with accelerated bookbuilt and fully marketed offerings than U.S. companies (see Table 1). Percent of new shares is marginally higher in Europe than in U.S. for both accelerated bookbuilt and fully marketed offerings. Since the difference is only marginal, it is not likely that the relative size drives the differences between the regions. In Table 3 the gross spread fee, underpricing, deal value, market value of equity and percent of equity issued (relative to the number of initial stocks in the company) are sorted into three different deal value (proceeds) groups (between 25 and 100 million USD, between 100 and 500 million USD and above 500 million USD). The gross spread mean and median are calculated for each subgroup. The gross spread fee differences between Europe and U.S. declines with larger offerings for fully marketed offerings, but the gross spread differences increase with more proceeds for accelerated bookbuilt offerings. If the U.S.gross spread fee mean (median) is divided by the same mean in Europe for each subgroups for fully 18

19 marketed offerings, the fraction is quite stable in different subgroups, but in accelerated bookbuilt offerings the fraction goes from a bit over one to over twice as much. The gross spread fee is clearly higher in U.S. For fully marketed offerings the mean and median underpricing differences are similar for offerings below 100 million USD (see Table 3). While the gross spread fee favors Europe, underpricing favors U.S. for proceeds over 100 million USD. In accelerated bookbuilt offerings, the underpricing between European and U.S. companies are similar for all three groups, while the gross spread favors Europe. This indicates that the gross spread fee is too high for U.S. companies compared to the underpricing. 3.3 Regulations in Europe and U.S. Since the average direct costs of issuing seasoned equity in U.S. are higher than in Europe, it is more likely that regulations in U.S. is not as efficient as in Europe. Hence, this section focuses on the U.S. regulations. In the Appendix (see section 6.1) the most important regulations in Europe when it comes to seasoned equity issuance, are summarized U.S. security regulations Eckbo (2008) gives a good overview of the U.S. regulations. Reference is therefore made to his handbook for details. However, the most important regulations are described in this section. Equity issuing companies in the U.S. market need to register the issue at the U.S. Securities and Exchange Commission (SEC) 16. There are some exceptions for small issues, private placements, mergers and reorganizations. Another important 16 cf. 19

20 Table 3: shows average gross spread fee, underpricing, deal value (million USD), market value of equity (million USD), and percent of current equity issued for European and U.S. SEO companies between 1990 and 2011 sorted on deal value (DV) of equity. UP is underpricing, MV is market value of equity and Per_eq = new shares divided by all initial shares in the company. European fully marketed offerings DV< <DV< 500 DV> 500 Variable Obs Mean Median Obs Mean Median Obs Mean Median gsf UP DV MV per_eq U.S. fully marketed offerings DV< <DV< 500 DV> 500 Variable Obs Mean Median Obs Mean Median Obs Mean Median gsf UP DV MV per_eq European accelerated bookbuilt offerings DV< <DV< 500 DV> 500 Variable Obs Mean Median Obs Mean Median Obs Mean Median gsf UP DV MV per_eq U.S. accelerated bookbuilt offerings DV< <DV< 500 DV> 500 Variable Obs Mean Median Obs Mean Median Obs Mean Median gsf UP DV MV per_eq

21 regulation is the Rule 144A, which was implemented in 1990 to reduce regulation costs for larger institutional buyers such as insurance companies, investment companies and pension funds. According to the rule these investors can sell or resell private placements without having to register these securities or hold them for a year (Eckbo (2008)). Our dataset from Dealogic contains information whether the issue is registered at SEC and/or follows the Rule 144A. Table 12 and Table 13 in Appendix reveal that for European fully marketed offerings (accelerated bookbuilt offerings) around 33% (23%) of the transactions had to register at the SEC. This gives us a chance to test whether this registration induces higher gross spread ratios. It is worth mentioning that the cost of SEC registration for the year 2012 is per million USD 17. Data from Dealogic allows us to distinguish between whether the deal is U.S. marketed and/or the deal is registered with SEC. A foreign issuer can issue equity in U.S. with a small Rule 144A private placement, but this method often leads to more discounted stocks due to lower liquidity in those issued stocks. Another way is to choose a public issue and register with the SEC. If they choose a public issue, the companies need to meet U.S. accounting and disclosure standards. Investor protection is high in the U.S. If you are not registered with SEC, you cannot sell much equity to U.S. investors, and you are not allowed to give prospects to them either. European firms often use U.S. lawyers to help them with the equity issue. Dealogic has legal costs information, and hence legal costs between the two regions are compared. The number of observations for European countries is only ten for both accelerated bookbuilt and fully marketed offerings, and hence we cannot say anything about the average legal costs in Europe. The database does not contain the legal costs for European SEC registering companies. Observations 17 cf. 21

22 for U.S companies are much higher, and the numbers indicate that legal costs related to SEOs are less than 5% of the total direct costs paid to the investment banks (sample: only SEC registering companies). Given the data available and the average size of the legal costs compared to direct costs in U.S., it does not seem likely that legal costs could explain much of the direct cost differences between Europe and U.S. Table 4: shows legal costs divided by the total direct costs paid to the investment banks for European and U.S. companies. Fully market offering Accelerated bookbuilt offering Regions Observations Legal costs (%) Observations Legal costs (%) Europe 5 3.5% % U.S % % Differences in bank regulations between Europe and U.S. The Glas-Stegall Act from 1933 seperated investment and commercial banking. One of the reasons why the act was removed in 1999 was to better competition in U.S. when it comes to financial services. Banks in U.S. could from 1999 be both a commercial and an investment bank. In Europe this restriction has not existed. Therefore until 1999, only an investment bank could be the underwriter in U.S., and in Europe the underwriter could be a universal (combination of commercial and investment) or an investment bank. This could potentially result in lower information costs and more competition in Europe. Customer relationship with the bank could be seen as a total package that the company has with the bank. In Germany, SEO companies are obligated to use a major German universal bank (Gebhardt et al. (2001)) For almost all issues, one of the underwriting banks is a bank with a special lending relationship with the issuing company. 22

23 3.4 Analysts and underwriters involvement Jeon and Ligon (2011) argue that the underwriter has bargaining power over the syndicate members such that they might accept lower fees. Using a star analyst as underwriter is not likely to affect the IPO direct cost fee because of the clustering of 7% IPO fee in U.S. (Abrahamson et al. (2011)). In our SEO sample, we do not find the same clustering, but the dominating banks in both markets are the same. Firms might involve a prestige manager because firms want the manager to signal high firm value. In order to improve the probability of success and reducing the discount, firms might also use commercial banks to certify firm quality. More highly reputable co-managers are another way to reduce asymmetric information. Jeon and Ligon (2011) find that the underwriting fee increases quadratically with number of co-managers. The Dealogic database has information about how many lead-managers, managers, co-managers, underwriters and banks the issuing company involves. For the fully marketed offerings the number of lead managers, managers, co-managers and bookrunners is higher in Europe than in U.S., while the U.S. transactions have higher number of underwriters and banks. This indicates that European firms should pay more asymmetric costs than their U.S. counterparts. The European accelerated bookbuilt offerings have less managers, bookrunners, underwriters, and banks than the U.S. transactions. It does not seem likely that these differences cause favorable gross spread fee in Europe due to lack of consistency between the two SEO types. Table 12 in Appendix reveals that 37% of European fully marketed offering companies use an investment bank to stabilize the stock price around the issue, while 59% of the U.S. companies try to stabilize the stock price. The corresponding numbers for European and U.S. accelerated bookbuilt offering are 20% and 71%, respectively (see Table 13 in Appendix). This difference should lead to higher cost 23

24 for U.S. companies. Companies often issue equity in many different markets at the same time. This could increase costs, but U.S. firms are more likely to issue just in one market than their European counterparts (see Table 12 and Table 13 in Appendix). 3.5 Control variables When running regressions, we need to consider additional variables that might be relevant in explaining the gross spread fee. Therefore, industry dummies 19 are included as well as year and country dummies. As a proxy variable for the time the issue takes, the number of days from the filing to the offer is used. This proxy is however weak since the deal could have been planned before the filing. European fully marketed offerings takes on average two days longer than the U.S. offerings, but the time differences between European and U.S. accelerated bookbuilt offerings are only marginal. The one-year stock return is also used to take account for financial condition of the company. We also control for one-year market returns (S&P500) because raising equity under good market conditions could lead the companies to get a lower gross spread fee. Last, the VIX index is used as measure of general market volatility The following industries are included bank, finance, retail, dining and lodging, healthcare, metal and steel, construction and building, auto and truck, utility and energy, insurance, consumer and products, aerospace, textile, food and beverage, agribusiness, machinery, forestry and paper, transportation, real estate and property, machinery, forestry and paper, mining, holding companies, telecommunications, computers and electronics, utility and energy, professional and services, publishing, chemicals, oil and gas and leisure and recreation. 20 Data is collected from Datastream. 24

25 4 Estimation and Results Differences between the two markets are identified, and the reasons behind are further investigated by regressions where gross spread fee (GSF) is the dependent variable. Interaction variables are introduced such that we can test for differences between the two regions. When we control for deal and firm specific properties, we can estimate the direct cost differences between Europe and U.S for accelerated bookbuilt and fully marketed offerings. The regression equation is: J K GSF i = β 0 + α j z i + β k x i + j=1 k=1 L γ l D i + ε i (1) l=1 where GSF is the gross spread fee, β 0, α j, β k and γ l are constants, j = {1,2,...,J}, k = {1,2,...,K}, l = {1,2,...,L} and ε is the error term. x includes the following variables: underpricing, proceeds (deal value), market value of equity, percent of equity issued, number of lead managers, managers, comanagers, underwriters, bookrunners, banks, tranches (number of markets that companies issue equity), number of days from filing to offer, one-year stock return, variance of stock returns (sum squared returns), dummy variables for whether the transaction is registered with SEC, is U.S. marketed, use stabilization agents, is a shelf take-down 21, have overnight exposure, is internet-related and makes prospectus. z includes J number of interaction variables where the dummy variable for Europe is multiplied by the following x variables: dummy variable for whether the transaction is SEC registered, is U.S. marketed, underpricing, use stabilization agents, has a prospectus, number of managers, banks and tranches. D includes all country and region variables (dummy variables for whether 21 The General Assembly has approved that the management can issue more seasoned equity when they want within a time period. The management take the agreement down from the "shelf" when they want. 25

26 the deal nationality is European, British, French, German, and Italian), industry dummy variables as listed in footnote 19, and time dummy variables. All equity issues that have missing observations, are deleted. The models are selected by using all variables and then stepwise excluding the least significant variable, but due to multicollinearity problems some variables are excluded earlier (see Table 14, Table 15, Table 16, and Table 17 in Appendix for correlation matrices). 22 The regression results for accelerated bookbuilt and fully markedet offerings are in Table 5 and Table 6 respectively. Regulation differences are tested by using country and region dummy variables (see Table 5 and Table 6). We use dummy variables for Europe (d_europe), France (d_france), Germany (d_germany), Italy (d_italy), and U.K. (d_uk). After controlling for company and transaction details, European deals are around 1.6% and 1.8% cheaper for accelerated bookbuilt and fully marketed offerings, respectively. In fully marketed offerings the Italian firms pay around 0.7% more than the rest of Europe. No other country effects are found. The significant industry and time dummy variables are included in the regressions. The results do not seem to be dependent on the industry dummies because the results are mainly the same without these dummy variables. Fully marketed offering transactions were marginally cheaper in the 90s (see Table 5), while accelerated bookbuilt offerings were marginal cheaper for 2007 and 2008 (see Table 6). European companies that register their equity issue with the SEC, pay on average higher gross spread fee for both SEO types. The interaction variable between the dummy for Europe and the dummy for whether the transaction is 22 For the U.S. fully marketed offering sample, the multicollinearity problem is not big because the sample is 5581, but this is not the case for Europe with only 460 observations. The multicollinearity problem is bigger for the European accelerated bookbuilt offerings because this sample size is only 137. Since the U.S. sample is 1073 for accelerated bookbuilt offerings, the multicollinearity problem is small. 26

27 registered at the SEC (I_sec) is around 1.1% to 1.4% for fully marketed offerings and accelerated bookbuilt, respectively (see Table 5 and Table 6). Whether the deal is U.S. marketed or not, do not impact the gross spread fee because this variable is insignificant. Table 18 in Appendix reveals that for fully marketed offering the SEC effect is higher after 2000 (1.2% before and 1.4% after). For the U.S. fully marketed offerings the number of managers reduces the gross spread fee significantly. The interaction variable between the dummy variable for Europe and the number of managers (I_n_managers) indicates that using more managers in Europe, significantly increases fully marketed offerings costs. This indicates that European firms have to pay higher asymmetric costs than their U.S. counterparts. For the accelerated bookbuilt offerings no significant differences in the use of managers, underwriters, bookrunners or banks are found. When companies do a shelf take-down, they pay on average less in gross spread fee for fully marketed offerings, but surprisingly for accelerated bookbuilt offerings companies have to pay around 0.7% extra. U.S. companies use more investment banks to stabilize the stock price than their European counterparts. This could induce more costs for U.S. companies on average. However regression results do not confirm that there is a difference between the two regions (see Table 5 and Table 6). Underpricing has positive effect on the gross spread fee for accelerated bookbuilt offerings, but surprisingly the underpricing in European fully marketed offerings are negatively related to the gross spread fee. U.S. fully marketed offering gross spread fees are positively related to the underpricing as expected. The use of more banks will increase the gross spread fee for both issuing types. The size effect, market value of equity and deal value (proceeds), have as expected a negative effect on the gross spread fee for both issuing types. The percent of new equity issued relative to initial number of shares is negatively related to the 27

28 fee. One-year stock and market return affect the gross spread positively the gross spread fee for fully marketed offerings and accelerated bookbuilt offerings- This indicates that companies do not pay so much attention to costs in good times. The market return variance (VIX) is not found to have an effect for accelerated bookbuilt and fully marketed offerings. The number of tranches is not significant after removing insignificant variables for accelerated bookbuilt offerings, while it affects the gross spread negatively in fully marketed offerings. Whether the time increases from filing to offer, increases the gross spread fee for both SEO types. Making prospectus in fully marketed offerings increases costs marginally but not for accelerated bookbuilt offerings. 28

29 Table 5: shows regression of the gross spread fee (gsf %) for fully marketed offerings on different explantory variables. The sample has been imposed the following restrictions: gross spread fee > 0, -70% < Underpricing < 20% deal value > 25 million USD. Variables which starts with d (N), are dummy variables (number variables). dm means that variables have been demeand and divided by its mean. I stands for interaction variable. I_sec = d_eur * d_secreg, I_n_managers = d_eur * n_managers, I_d_stabil = d_eur * d_stabil, I_n_tranches = d_eur * n_tranches, I_underpricing = d_eur * Underpricing and I_d_usmarketed = d_eur * d_usmarketed. d1990s = 1 before 2000 and 0 otherwise. p-values in brackets. gsf gsf gsf gsf gsf Variables b/p b/p b/p b/p b/p d_eur (0.000) (0.000) (0.000) (0.000) (0.000) d_ita (0.006) (0.004) (0.047) (0.000) (0.001) I_sec (0.000) (0.000) (0.000) (0.000) (0.000) I_n_managers (0.000) (0.000) (0.000) (0.000) (0.000) I_d_ stabilizationagent (0.223) I_d_usmarketed (0.242) I_underpricing (0.001) (0.001) (0.001) (0.000) (0.000) dm_underpricing (0.000) (0.000) (0.000) (0.000) (0.000) SP500ret1y (0.036) (0.026) (0.000) (0.063) (0.000) stock1yreturns (0.000) (0.000) (0.000) dm_vix (0.653) dm_filing2offer (0.001) (0.001) (0.002) dm_marketvalue (0.148) (0.140) (0.074) (0.000) (0.000) Continued on next page 29

30 Table 5 Continued from previous page gsf gsf gsf gsf gsf Variables b/p b/p b/p b/p b/p dm_dealvalue (0.000) (0.000) (0.000) (0.000) (0.000) dm_percent_of_equity (0.000) (0.000) (0.000) (0.000) (0.000) dm_n_managers (0.000) (0.000) (0.000) (0.000) (0.000) dm_n_managers (0.000) (0.000) (0.000) (0.000) (0.000) dm_n_underwriters (0.000) (0.000) (0.000) dm_n_banks (0.000) (0.000) (0.000) d_shelftakedown (0.006) (0.006) (0.000) (0.001) (0.000) d_prospectus (0.908) (0.075) (0.042) dm_n_tranches (0.000) (0.000) (0.000) (0.000) (0.000) d_ stabilizationagent (0.001) (0.000) (0.000) (0.031) (0.042) d_internetrelated (0.000) (0.000) (0.000) d_healthcare (0.000) (0.000) (0.000) d_autotruck (0.031) (0.030) (0.016) d_utilityenergy (0.000) (0.000) (0.000) d_forestrypaper (0.319) (0.224) (0.021) d1990s (0.000) (0.000) (0.000) (0.000) (0.000) constant (0.000) (0.000) (0.000) (0.000) (0.000) R Observations

31 Table 6: shows regression of the gross spread fee (gsf %) for accelerated bookbuilt offerings on different explantory variables. The sample has been imposed the following restrictions: gross spread fee > 0, -70% < Underpricing < 20% deal value > 25 million USD. Variables which starts with d (N), are dummy variables (number variables). dm means that variables have been demeand and divided by its mean. I stands for Interaction variable. I_sec = d_eur * d_secreg, I_d_stabil = d_eur * d_stabil and I_n_tranches = d_eur * n_tranches. d20078 = 1 if year is 2007 or 2008 and 0 otherwise. p-values in brackets. gsf gsf gsf gsf gsf Variables b/p b/p b/p b/p b/p d_eur (0.000) (0.000) (0.000) (0.000) (0.000) I_sec (0.000) (0.000) (0.000) (0.000) (0.000) I_d_StabilizationAgents (0.158) I_n_tranches (0.007) (0.121) (0.131) I_underpricing (0.633) dm_underpricing (0.004) (0.001) (0.002) (0.001) (0.002) stock1yreturns (0.308) SP500ret1y (0.013) (0.002) (0.000) (0.002) (0.000) dm_vix (0.834) dm_marketvalue (0.008) (0.017) (0.083) (0.020) (0.092) dm_dv (0.000) (0.000) (0.000) (0.000) (0.000) dm_percent_of_equity (0.000) (0.000) (0.000) (0.000) (0.000) dm_n_managers (0.059) (0.004) (0.011) (0.004) (0.010) dm_n_banks (0.070) (0.012) (0.264) (0.014) (0.277) Continued on next page 31

32 Table 6 Continued from previous page gsf gsf gsf gsf Variables b/p b/p b/p b/p b/p dm_n_tranches (0.035) dm_filing2offer (0.024) (0.027) d_shelftakedown (0.000) (0.000) (0.000) (0.000) (0.000) d_stabilizationagents (0.655) (0.146) (0.194) d_bank (0.032) (0.013) (0.016) d_finance (0.000) (0.000) (0.000) d_healthcare (0.000) (0.000) (0.000) d_utilityenergy (0.000) (0.000) (0.000) d_insurance (0.000) (0.000) (0.000) d_foodbeverage (0.029) (0.016) (0.021) d_leisurerecreation (0.003) (0.004) (0.004) d (0.001) (0.001) (0.002) (0.001) (0.002) constant (0.000) (0.000) (0.000) (0.000) (0.000) R Observations