According to a study conducted by Professor Tim Loughran of the University of Notre Dame and Professor Simona Mola of Arizona State University, the average offering of new shares on the NYSE is priced at a discount of 2 percent from the closing price on the day before the issue. On Nasdaq, the average discount is 4.1 percent.           

“It’s a positive for the issuing firm to leave less money on the table,” said Professor Loughran, adding that discounts represent an indirect cost of issuing new shares.  As such, he said, secondary offerings on Nasdaq cost issuers more than twice as much as on the NYSE.           

“The study clearly points to a significant discount difference between the two exchanges,” said NYSE Group Chief Economist Paul Bennett.           

The study analyzed 5,505 U.S. secondary offerings during 1986–2003. It found that while discounts increased over time on both exchanges, the increase was more pronounced on Nasdaq.  The average discount on NYSE issues increased from 0.7 percent in 1986 to 3 percent in 2003.  The average discount on Nasdaq secondary offerings, in contrast, increased from 0.6 percent to 5.1 percent during that time period.           

The analysis is an offshoot of an earlier study published in the March 2004 issue of the Journal of Financial and Quantitative Analysis, an authoritative quarterly publication on financial economics.  The study was precipitated by the sharp rise in average discounts on secondary offerings since the late 1980s.           

The updated study explored possible reasons for the differences in the discount on the two exchanges, such as the riskiness of individual issues.  Perhaps, it posited, the greater preponderance of technology offerings on Nasdaq explained the higher discounts.  The study found that it did not.  Other factors, such as the quality of underwriters, were equally unpersuasive in explaining the difference in discount levels. After adjusting for a variety of factors, the analysis concluded that the difference was due to the exchanges themselves.

“It’s something about the exchanges that’s driving it,” said Professor Loughran of the different discount levels.   An in-depth regression analysis pinpointed the exact cost attributed exclusively to the exchanges.   The study revealed that Nasdaq firms experience a discount 153 basis points higher than comparable NYSE-listed firms during 1998–2003, a difference that is statistically and economically significant, according to Professor Loughran. 

The analysis also looked at the clustering of offer prices around whole dollars and increments of 25 cents, behavior that leads to higher average discounts and increases the indirect cost of issuing new shares.   The study found that the tendency to cluster around whole integers persisted even after the switch to the pricing of stocks in pennies from fractions in 2001. 

In other words, writes Professor Loughran, “the offer price is set at the closing market price but rounded down to the near, but not necessarily to the next, integer.  For a stock trading at $51.37, the offer price might even be rounded to $50.”

The analysis showed that secondary offerings on Nasdaq have a greater propensity to price in whole dollars than on the NYSE. About 42 percent of Nasdaq issues were priced in whole dollars compared to less than 30 percent for NYSE issues. 

“The discounting and clustering in secondary offering prices have a strong impact on an issuer’s ultimate cost,” said Mr. Bennett.   “The study shows that from a cost perspective, issuers on the NYSE fare significantly better.” 

Click here for a copy of the study.