An Examination of Seasoned Equity Offer Placement Effort

Altınkılıç and Hansen (2000) show that underwriter spreads in seasoned equity offerings (SEOs) overwhelmingly reflect variable costs. This research attempts to begin filling the gap created by this result, as to what are the important constituents of the variable costs. In particular, I investigate the hypothesis that an important part of underwriter compensation is partial payment for anticipated market making activities in the secondary market, once the offer begins. I show that lead underwriter market making activities following an SEO are partly paid through the spread. The lower bound cost estimates show that the spreads for firms likely to require the most market making services are on average 100 basis points higher than those requiring the least services. On average, the compensation for market making activities amounts to 20% of the lead underwriter's total compensation. The results are robust to several considerations.