We examine the severity of and determinants of market overhang when firms file shelves, controlling for selection effects.
Finally, we explore why some high information-asymmetry firms use shelf even though they experience high market overhang. We find these firms pay lower gross spreads and go to market faster than the same type of firm that chooses the traditional registration procedure.
As discussed above, managers avoided registering common equity on allocated equity shelves because they feared doing so would result in high levels of prolonged market overhang. (7) Models of asymmetric-information such as Ambarish, John, and Williams (1987), Myers and Majluf (1984), and Cooney and Kalay (1993) demonstrate that the cost of raising equity capital is positively related to asymmetric information.
In related work, Denis 1991) examines allocated-equity shelves in the early 1980s to test whether market overhang is more severe for shelf firms that need underwriter certification of firm value than for those that do not need certification.
But, it is important to note that much of the market overhang
is concentrated in the Northeast and shows few signs of leading to a national real estate market contraction.