Johnson, Keith B.; Morton, T. Gregory; Findlay III, M. Chapman
December 1975
Financial Management (1972);Winter75, Vol. 4 Issue 4, p12
Academic Journal
This article presents the results of an empirical study of the flotation costs of preferred and convertible preferred shares and convertible bonds between 1971 and 1972. Specifically, regression techniques are employed to explain the direct issuance cost ratio, such as gross spread plus other direct expenses to gross total dollar amount raised, in terms of independent variables suggested by theory and prior studies. The data employed in this study were obtained on a computer tape from the U.S. Securities and Exchange Commission and consist of variables related to each issue registered with that body and sold in the country during the study period. The results of the study quantified the determinants of the flotation cost of corporate quasi-equity securities. After employing factor analysis to moderate multicollinearity, regressions from theoretically defensible variables were generated to explain variance of the total expense ratio. Most of the empirical results appeared to be consistent with a priori expectations and prior studies of other types of securities. Finally, it is discovered that the population of firms issuing straight and convertible preferred stocks may contain significantly heterogeneous sub-groups, which should be carefully considered before undertaking any analysis.


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