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11 June 2020 CFA Institute Journal Review

At-the-Market Offerings (Summary)

  1. Richard Wiggins

CFA Institute Journal Review summarizes "At-the-Market Offerings," by Matthew T. Billett, Ioannis V. Floros, and Jon A. Garfinkel, published in Journal of Financial and Quantitative Analysis, Vol. 54, No. 3 (June 2019).

The authors examine at-the-market (ATM) equity offerings. These direct share issuances, sold in the secondary market, do not engage underwriters and involve the distribution of shares in small quantities over a multiyear period rather than all at once. The authors examine which type of firms is likely to use ATM offerings rather than traditional, underwritten seasoned equity offerings.

What Is the Investment Issue?

At-the-market (ATM) offerings are a relatively new and increasingly popular approach to issuing equity directly into the secondary market. ATM offerings effectively became possible starting in 2008 as a result of regulatory changes that gave smaller firms access to shelf registration. A placement agent, acting solely as a broker, facilitates the direct-from-shelf placement of non-underwritten shares into the secondary market. Although ATM offerings thereby provide immediacy, they carry the risk of forgone investment bank certification and marketing. Via the use of ATM offerings, a firm could issue fewer shares than the total amount authorized and could “dribble out” the shares by offering packets of small quantities over a three-year period. ATM offering growth—in terms of both relative proceeds and relative incidence—has been strong compared with that of underwritten seasoned equity offerings (SEOs) and private placements known as “private investment in public equity” (PIPE).

How Did the Authors Conduct This Research?

The authors compare three major follow-on equity issuance techniques (SEO, ATM, and PIPE) over a primary sample window from 1 January 2008 to 31 December 2015. SEO data reflect US common stock issuances drawn from the Securities Data Corporation database. The authors primarily hand-collected ATM data and verified them using information from The Deal’s PrivateRaise database. The authors provide brief descriptions of the types of firms that tend to use either SEOs or ATM offerings and then examine how firms choose between the two issuance approaches. The authors round out their study by providing evidence that ATM firms tend to save cash from the proceeds of an issuance (versus SEOs) and evidence on ATM firms’ dribble-out activity.

The general thinking is that asymmetric information (i.e., the extent to which a firm’s managers know more about the company than outside investors) and unobservable firm quality are the two key variables explaining a company’s ATM/SEO issuance choice. The authors proxy the degree of asymmetric information with a measure of accruals quality (also known as opacity), which is the standard deviation of residuals from a regression explaining accruals. Unobservable firm quality is determined by measuring how analyst recommendations change before and after the issuance event. The authors test the joint influence of (unobserved) firm quality and asymmetric information using a logit regression. Trading-related variables are also examined to determine whether the evidence is consistent with the perceived advantage of ATM issuance optionality and market impact.

What Are the Findings and Implications for Investors and Investment Professionals?

Firms that choose ATM issuance are clearly different from those that select SEO issuance. ATM firms have greater asymmetric information than SEO firms, are generally smaller in size, make larger investments in R&D, and experience higher growth opportunities, but they are less profitable (with a concentration among money-losing biotech companies). In addition, ATM firms tend to exhibit lower leverage but higher market-to-book ratios and to carry larger cash balances. These findings suggest that ATM issuers may be more opaque and of lower quality than SEO issuers, indicating greater information asymmetry. The implication is that the certification associated with using an underwriter could confer some benefits but doing so involves potential costs. Other determinants of a firm’s choice between ATM and SEO issuance exist.

In an ATM offering, a company sells newly issued shares at market prices incrementally into the secondary market through a broker/dealer. A subsequent advantage ATM offerings might provide, then, is that the price impact is smaller when fewer shares are issued at a time, especially ATM offerings of stocks with low institutional demand. Unlike a traditional stock offering in which a set number of shares is sold at a fixed price all at once, an ATM offering sells shares incrementally at the prevailing market prices: selling at the market. A company can start, stop, or “dribble out” the sale of shares depending on market conditions (i.e., sell more shares when prices are high). ATM offerings may rely more on retail demand for shares, but they also provide an avenue for leverage reduction that captures this timing option. The evidence suggests that ATM offerings moderate the need to carry financial slack (i.e., cash and marketable securities).

The findings are important for understanding corporate financial policy decisions and add to the literature on the significance of regulation for capital acquisition.

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