Seasoned Equity Issues in a Closely Held Market: Evidence from France

This paper examines seasoned equity offerings in France.Even though a rights offering is the primary flotation method, French companies are increasingly usingthe relatively expensive public offering method. We show that the market reaction to the announcementof seasoned equity issues is significantly negative for rights issues and insignificantly negative forpublic offerings. Our results suggest that the adverse selection effect is greater for rights issues thanfor public offerings, due to stronger underwriter certification for the public offerings. We find that theshare price effect is positively related to blockholders take-up renouncements for firms with priorconcentrated ownership. For these firms, the favourable ownership dispersion effect offsets the adverse selection effect.     

Rights Offerings and Corporate Financial Condition

Certain American industrial firms still use equity rights offerings. Most of these offerings are uninsured. I examine firms' financing decisions, and develop the explanation that rights offerings are used by firms in financial distress with difficulty accessing underwriting services. These firms have little to lose from the costs of adverse selection that accompany the lack of underwriter certification of uninsured rights offerings. Probit analysis of 660 seasoned NYSE, Amex, and Nasdaq equity issues between 1983–1999 yields results consistent with my explanation. There is no evidence that variables previously linked to rights usage (e.g., ownership concentration) continue to be relevant to the issue method choice.     

Some Evidence on the Uniqueness of Initial Public Debt Offerings

Debt initial public offerings (IPOs) represent a major shift in a firm's financing policy by both extending debt maturity and altering the public-private debt mix. In contrast to findings for seasoned debt offerings, we document a significantly negative stock price response to debt IPO announcements. This result is consistent with debt maturity and debt ownership structure theories. The equity wealth effect is negatively related to the offer's maturity, and positively related to the degree of bank monitoring. We find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response.     

Institutional Shareholder Investment Horizons and Seasoned Equity Offerings

Firms with more short‐term institutional shareholders experience significantly more negative abnormal returns at the announcement of seasoned equity offerings. This effect is strong for primary offerings (only firms receive proceeds), but is not present for secondary offerings (firms do not receive any proceeds). Furthermore, a shorter institutional shareholder investment horizon predicts poorer postissue abnormal operating performance and the negative effect of a shorter shareholder horizon is mitigated by higher managerial ownership. My results are consistent with the argument that long‐term shareholders more carefully monitor managerial activities and prevent misuse of the cash flow provided by equity issues.     

Seasoned Equity Offerings: Stock Market Liquidity and the Rights Offer Paradox

This paper examines the impact of market liquidity on seasoned equity offerings (SEO) characteristics in France. We find that, besides blockholders’ takeup, liquidity is an important determinant of SEO flotation method choice. We document higher direct equity offering flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. After controlling for endogeneity in the choice of SEO flotation method, we find that pure public offerings and standby rights are comparable in terms of direct costs and liquidity improvement. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.     

SEASONED EQUITY OFFERINGS FOR NEW INVESTMENT AND THE INFORMATION CONTENT OF INSIDER TRADES

Significant negative valuation effects are widely acknowledged for firms announcing seasoned equity offerings. This result is consistent with theoretical models linking new equity issues to increased adverse-selection costs, lower management ownership in the firm, misuse of free cash flow, or expectations for earnings declines. Also increasingly evident, insiders trade around corporate announcements. We test the hypothesis that insider trading and announcements of new equity issues serve as joint signals in the market's evaluation of prospective capital investment projects. Our findings are consistent with the hypothesis that insider trading is related to market reaction to announcements of new equity issues.     

Motivations for public equity offers: An international perspective

This paper examines the motivations for public equity offers, using a sample of 17,226 initial public offerings and 13,142 seasoned equity offerings from 38 countries between 1990 and 2003. We estimate the uses of funds raised in both initial and seasoned offerings. Firms appear to spend incremental dollars on both R&D and capital expenditures, consistent with the investment financing explanation of equity issues. However, consistent with the mispricing explanation, high market to book firms tend to save more cash and offer a higher fraction of secondary shares in SEOs than low market to book firms.     

Seasoned equity offerings and the short- and long-run performance of initial public offerings in the UK

In contrast to the US practice, rights issues is the predominant method of raising additional equity capital in the London market. the UK evidence for the period 1980-1991 provides no support to the hypothesis that IPO firms deliberately underprice to signal their quality and facilitate subsequent seasoned equity offerings. the level of initial returns is related neither to the size of the issue nor to the price response at the announcement of a rights issue. the results demonstrate, however, that firms with higher first day returns are quicker in returning to the market for additional equity capital. There is also strong evidence to suggest that the announcement of a seasoned equity offering follows a period of significant rises in the stock prices of reissuing firms. Such gains are, however, dissipated quickly in the 18 months after the announcement of the seasoned equity offering. the level of underperformance is particularly pronounced for firms that raised relatively small subsequent amounts of capital in relation to funds raised at the initial offering. Thus, the paper documents a pattern of post-issue behaviour which is fundamentally similar for both unseasoned and seasoned equity offerings.     

The revival of shelf-registered corporate equity offerings

We report that traditional seasoned equity offerings (SEOs) are no longer firms' preferred choice for raising seasoned public equity. Traditional offerings have recently been surpassed by shelf-registered offerings in terms of both annual frequency and total capital raised. This represents a dramatic shift from the 1980s, during which the overwhelming majority of firms favored traditional over shelf-registered offerings. We find that the growth in shelf use is related to firms increasingly valuing and using the option feature of shelf registration to defer offerings. Moreover, the evidence indicates that the way firms now use shelf offerings resolves the shelf under-certification problem and results in no larger market penalties and significantly lower underwriter fees relative to non-shelf offerings. Finally, firms often use universal shelf filings and choose between debt and equity offerings based on the prevailing relative market conditions.     

Institutional ownership and the choice of equity issue method

We examine how institutional ownership, which reflects the informational efficiency of stock prices (Boehmer and Kelley, 2009), impacts the seasoned equity offering (SEO) issue method choice between shelf offerings and traditional SEOs. We find that firms with greater institutional ownership, particularly long term ownership, tend to choose shelf offerings. We control for issue method choice and find that the offer discount decreases with institutional ownership for both shelf and traditional issuers and that higher institutional ownership reduces direct issue costs and is related to a shorter due diligence process for traditional SEOs. This suggests that underwriters are more likely to be able to perform the certification function (and with less effort) for issuers whose stock is priced more efficiently.     

Why Do Firms Issue Equity after Splitting Stocks?

This paper examines the motivations of firms that conduct seasoned equity offerings (SEOs) after splitting stocks. We find no difference in equity announcement and issue period returns between these firms and other equity‐issuing firms, suggesting that firms do not split stocks to reveal information and reduce adverse selection costs at the subsequent SEO. However, because investors react positively to split announcements, firms that issue equity after splitting stocks sell new shares at a higher price and raise more funds. We also find that firms split stocks to make the subsequent SEO more marketable to individual investors who are attracted to low‐priced shares.     

The Seasoned‐Equity Issues of UK Firms: Market Reaction and Issuance Method Choice

Abstract:   This study examines the seasoned equity issues of companies traded on the London Stock Exchange. Recent regulatory changes have allowed UK firms more discretion in choice of issue approach, and this has led many firms to issue through placing in preference to a rights issue. Having first documented the trend towards increasing use of placings, we go on to identify an interesting subset of placings that are less likely to be anticipated by the market, and find a significant positive market reaction to such placings, which contrasts with the significant negative reaction we find for issues by rights. We also examine the choice of seasoned equity issuance method, focusing on the choice between placings versus rights issues. We develop a model to explain the choice of equity issue method that achieves a high level of predictive accuracy.     

Stock vs. stock-warrant units: evidence from seasoned offerings

Recent theories based on sequential financing and information signaling reveal a special role for warrants. Data from initial public offerings (IPOs) of stock-warrant units have been used to test the theories, and we extend the analysis to seasoned offerings. Consistent with predictions from both families of theories, we find that issues made by smaller and younger firms are more likely to involve stock-warrant units, and firms with greater stock price volatility are more likely to issue units in seasoned offerings. Moreover, firms with relatively high levels of long-term debt, and those whose issues are underwritten by less prestigious underwriters are more likely to employ stock-warrant unit financing. Consistent with information signaling, we find that firms with high managerial ownership are more likely to issue units. Firms that include warrants in their stock offerings are predicted to have experienced higher abnormal stock returns than if they had issued shares alone. Thus, consistent with both theoretical explanations, some firms can reduce capital costs by adding warrants to shares in seasoned offerings.     

Comovement and investment banking networks

We test the hypothesis that investment banking networks affect stock prices and trading behavior. Consistent with the notion that investment banks serve as information hubs for segmented groups of investors, the stock prices of firms that use the same lead underwriter during their equity offerings tend to move together. We also find that when firms switch underwriters between their initial public offering (IPO) and a seasoned equity offering (SEO), they comove less with the stocks associated with the old bank and more with the stocks associated with the new bank. This change in comovement is greater for stocks completing their first SEO and for those experiencing large changes in institutional ownership.     

Equity financing capacity and stock returns: Evidence from China

We examine the relation between the capacity for financing through rights and seasoned public offers of equity and subsequent stock returns in China. The results show that the capacity for rights and public offers is reliably negatively related with future returns for firms that met regulatory criteria. Further, the capacity for rights offers is strongly negatively related with returns for firms that met the criteria and applied for approval, and for firms that issued equity after meeting the criteria and obtaining approval. Thus, there is clear evidence of a negative relation between equity financing capacity and stock returns in China.     

Why do firms issue private equity repeatedly? On the motives and information content of multiple PIPE offerings

This study examines why private equity issues tend to be a repeated source of financing for public firms. We test the recent operational needs theory of public equity issuance within the context of repeated private equity issues. We find that repeated PIPE issuers burn through cash quickly and do not reach the standards of information transparency or profitability needed for a successful public equity offering. This has implications for investor composition and the market response to a PIPE. Initial PIPE offerings are characterized by substantial diversity in investor type. In successive transactions firms increasingly rely upon hedge funds, who extract greater price discounts and more often require cash flow rights as opposed to control rights. As firms select a path of repeated PIPEs to raise funds, successive issues become uninformative to the market. We conclude that, for small public firms, the same motive underlies public equity offerings and repeated private equity offerings—an acute need for cash.     

Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

We use hand-collected data on the management quality of firms making seasoned equity offerings (SEOs) or initial public offerings (IPOs) to analyze the relationship between management quality and equity issue characteristics, and to compare the effect of management quality on SEOs versus IPOs. We hypothesize that higher quality managers are more credible to equity market investors, thereby reducing the information asymmetry they face in the market and outsiders’ information production costs. Therefore, the equity issues of higher management quality firms will have more reputable underwriters, smaller underwriting spreads, and other expenses, and smaller SEO discounts. Further, since better managers will be able to select better projects, higher management quality firms will have larger offer sizes. Finally, since SEO firms are likely to suffer from less information asymmetry compared to IPO firms, these effects will be smaller for SEOs than for IPOs. Our findings support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs provide further support for these hypotheses.     

The pricing of U.S. IPOs by seasoned foreign firms

We examine the pricing of U.S. initial public offerings (IPOs) by foreign firms that are already seasoned in their domestic countries. Presumably, these equity offers have less downside risk for investors than typical IPOs since domestic share prices can be used to help establish a preoffer value for the firm's equity. In spite of the presumed diminished downside risk, we find that offers by firms from countries that impose foreign ownership restrictions and capital controls are on average underpriced, experiencing an average first-day return in the United States of 12.7%. This result stems in part from the underwriter's failure to price the issue to fully reflect the postoffer premium that often arises for the U.S. shares. In contrast, offers by firms from countries without ownership restrictions have an average first-day return of 0.0%.     

The choice between rights and underwritten equity offerings: Evidence from Chinese stock markets

We study the choice and valuation effects of alternative flotation methods using a sample of Chinese firms that must meet the return on equity (ROE) thresholds set by the government to raise equity capital. The ROE requirement, although changed over time, seems to play an important role on the valuation and performance of seasoned equity offerings. The analysis of 219 rights and 75 underwritten offerings between 2000 and 2004 shows that Chinese firms that are not qualified for the flotation method with a higher ROE requirement suffer the most at announcement and experience significantly lower buy-and-hold abnormal returns than those that are qualified. Our results suggest that the freedom to choose their preferred flotation method may be valuable to firms that meet the higher ROE requirement. Finally, our probit models identify several determinants of the choice of flotation methods.