Underwriting Costs and Market Value Effects of Raising Bank Capital

James W. Wansley (University of Tennessee, Stokely Management Center, Department of Finance, Knoxville)
Upinder S. Dhillon (SUNY‐Binghamton, School of Management, Binghamton)

Managerial Finance

ISSN: 0307-4358

Publication date: 1 September 1997

Abstract

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.

Citation

Wansley, J.W. and Dhillon, U.S. (1997), "Underwriting Costs and Market Value Effects of Raising Bank Capital", Managerial Finance, Vol. 23 No. 9, pp. 55-68. https://doi.org/10.1108/eb018647

Publisher

:

MCB UP Ltd

Copyright © 1997, MCB UP Limited

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