Seasoned equity offerings in Brazil: the impact of restricted efforts method on direct and indirect costs

Orientador(a): Walter Novaes

In 2014, the Brazilian Securities and Exchange Commission included equity offerings in the restricted efforts regulatory instruction, allowing firms to issue equity through simpler, faster procedures, disclosing less information to the market. In turn, firms choosing that issuance method are allowed to sell their new shares to a group consisting of no more than 50 qualified investors. Since the new rules came into force, almost all seasoned equity offerings carried out by listed companies took place under restricted efforts. In this work, we study the impact of the new regulatory setting on two types of costs regarding seasoned equity offerings: the first, an indirect one, is the effect of offering announcements on the issuer’s stock price. An event study shows that abnormal returns in a three-day window around the announcement are, on average, 3.23 percentage points higher when the company issues equity under restricted efforts rather than traditional rules. The second type of cost, the direct one, consists of fees paid to the underwriters and other expenses. Under restricted efforts, those fees (as a percentage of total offering proceeds) are, on average, 1.01 percentage point lower than fees charged in the offerings that follow the traditional procedures. We argue that the reduction in the two types of costs is due (at least partially) to the mitigation of information asymmetry provided by the new issuance method.