The rule has been controversial. Arguments have been constructed against shelf registration:

1. The costs of new issues might go up because underwriters might not be able to provide as much current information to potential investors as they would otherwise, so investors would pay less. The expense of selling the issue piece by piece might therefore be higher than that of selling it all at once.

2. Some investment bankers have argued that shelf registration will cause a “market overhang” that will depress market prices. In other words, the possibility that the company may increase the supply of stock at any time will have a negative impact on the current stock price. Shelf registration is much more common with bonds than stocks, but some equity shelf sales do occur. For example, in late 1998, Ford Motor filed a shelf registration to issue 10 million shares of common stock. It planned to use the shares to buy dealer ships to expand its Ford Retail Network. Under the plan, Ford would acquire dealerships in selected cities to create a more cohesive sales network. Of the 5,300 Ford dealerships in the United States, Ford itself owns only a fraction. The shelf offering allows Ford to issue the stock only when needed for an acquisition. In August of 2001, Corning, maker of fiber optic cable and other photonic products, announced that it would sell 14,222,500 shares of its common stock, raising over $200 million, under its existing $5 billion shelf registration statement. The money was needed to help fund Corning’s purchase of several fiber optic manufacturers from cash-strapped Lucent.

CONCEPT QUESTIONS

a What is shelf registration?

b What are the arguments against shelf registration?