A study from the University of Iowa finds that a new form of issuing stock that doesn’t require an investment banker has been embraced by certain types of businesses those banks typically eschew.

The study finds that in the first eight years of At-The-Market (ATM) stock offerings, they were typically used by smaller, growth-oriented firms, that were generally more opaque in their financials and also had weaker recommendations from analysts. These characteristics would typically cause the firm to be priced by the bank at too much of a discount to justify investment bank services.

Jon Garfinkel, professor of finance in the Tippie College of Business and study co-author, says biotech companies that are losing money have a particular propensity for using the mechanism, in part because they’re small and their business is complicated.

Firms first started issuing stock via ATM offerings in 2008, after changes in federal securities rules made them much easier to facilitate. His study looked at how firms responded to the new issuance technique in its first eight years and found that while firms were slow to start using them—their use in 2008 was negligible—they’ve become more frequently used over time so that by 2016, 163 offerings were made at the market. That was 63 percent of total new stock offerings, and 26 percent of the market value of new stock issued for sale through more traditional means, called seasoned equity offerings. The ATM offerings generated $20 billion in capital for their issuing firms.

He says 65 percent of the proceeds from ATM offerings were used to stockpile cash, as opposed to 84 percent of proceeds generated by seasoned equity offerings. Firms also tended to issue the stock when the price was rising, with less activity while the price was dropping. 

“ATMs seem to work well for staged investment where the firm and its investors prefer the dribble-out approach, rather than raising a huge block of equity capital all at once,” Garfinkel says.

Garfinkel’s paper, “At The Market Offerings,” was published recently in the Journal of Financial and Quantitative Analysis.