In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification.

Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer "greener pastures."

Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer “greener pastures.”

In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification. Copyright 2003, Oxford University Press.