1. Frontiers of Finance Conference January 2005 Unallocated Shelf Registration: Why Doesn’t Everybody Use it? Jennifer E. Bethel Babson College Laurie Krigman Babson College

2. Deregulation of the offering registration process Traditional Registration Allocated Shelf Registration Traditional Registration Allocated Shelf Registration Unallocated Shelf Registration 19821992

3. 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?

4. 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

5. 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

6. Benefits of shelf registration Experience lower direct issuance costs Gross Spreads SEO Discounting Avoid regulatory uncertainty and delays Exploit short-term pricing opportunities

7. Prospectuses registered between 10/29/92 and 12/31/01. No REITS, financial services firms, and ADRs in the sample. Sample Traditional 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 Unallocated Shelf Registrations

8. 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

9. Announcement Effects: Market Overhang

10. Cost of issuing common equity

11. Benefits of shelves

12. 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

13. 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

14. 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

15. 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

16. Conclusion Managers choose registration strategies to maximize value…Shelf registration is valuable for some firms. The SEC succeeded in deregulating the equity issuance process…but only for certain (the “right”?) firms… No need to worry about eligibility requirements…