Dangers in data adjustment: the case of rights issues and returns

In this paper we alert researchers to the potential for unrecognised errors in using adjusted price and daily return data. This problem is illustrated by considering the case of ex‐rights price adjustments. We present five alternative adjustment procedures that would be expected to generate similar results. We show, however, that these procedures result in significantly different dilution factors and returns. Our investigations suggest that the problem is associated with the theoretical valuation of the rights. In a substantial proportion of cases, the standard textbook model is inappropriate because of the non‐standard nature of the rights issue. Correcting for these non‐standard cases is a non‐trivial task since they constitute more than half of the issues. The extent of this problem does not appear to be well recognised. Deletion of non‐standard rights issues eliminates extreme values in dilution factors, but statistically significant differences remain. Our moral is simple; uncritical acceptance of data 'as is' from computer data files may lead researchers to erroneous conclusions. It also seems noteworthy that the standard textbook model of rights pricing only applied to a minority of Australian rights issues over recent years. This result has implications for the calculation of EPS under AASB 1027. As a by‐product, our analysis suggests that the ex‐rights daily return is close to zero.     

Earnings management at rights issues thresholds—Evidence from China

Burgstahler and Dichev (BD) (Burgstahler, David, Ilia, Dichev, 1997. Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics 23(1), 99–126.) and Degorge, Patel, and Zeckhauser (DPZ) (Degeorge, Franscois, Patel, Jayendu, Zeckhauser, Richard, 1999. Earnings management to exceed thresholds. Journal of Business 72(1), 1–33.) examine earnings management among American firms by looking at actual distributions around critical thresholds. Chinese firms must meet minimal ROE requirements if they are to have rights issues. Using a distribution approach, we examine whether Chinese firms manipulate their earnings to meet the regulatory requirements. Our empirical findings indicate that Chinese firms indeed heavily engaged in earnings management to meet the rights issue thresholds during the period 1994–2002. In addition, we show that these firms changed their behavior in response to changes in regulatory requirements. Furthermore, we analyse the pervasiveness of this practice and the means used in earnings management at the relevant ROE thresholds. Our findings have direct policy implications for the China Securities Regulatory Committee (CSRC).     

Long-horizon abnormal performance following rights issues and placings: Additional evidence from the U.K. market

We revisit the long-horizon abnormal performance of U.K. firms following rights issues and placings over the period 1989-1997. We make the following contributions relative to prior research. First, we use, as far as we are aware, a more comprehensive data set of rights issues and placings than hitherto studied for the U.K. market. We thus exploit the fact that issuing new equity predominantly through rights issues is a feature of the U.K. equity market that differs from the U.S. and other markets, where public offers dominate seasoned equity issues. Second, we study both the pre- and post-offer long-horizon performance, complementing previous research that focuses only on announcement-day wealth effects. Third, we apply various metrics and revisit the evidence of long-horizon post-offer underperformance reported in previous research. We find, however, little evidence of long-horizon post-offer underperformance for U.K. firms following issues of equity through rights issues or by placings.     

The rise of UK Seasoned Equity Offerings (SEOs) fees during the financial crisis: The role of institutional shareholders and underwriters

This paper investigates the increase in underwriting fees for UK SEOs since the beginning of the financial crisis in mid-2007. We develop and test a number of hypotheses related to the role of institutional shareholders and underwriters involved in the issuing process. We find that the rise in fees is related to the strengthening of the relative negotiating position of a specific underwriter in comparison to a specific issuer and to the growing influence of institutional shareholders with short-term investment horizons. Our evidence suggests that there may be reasonable grounds for considering potential conflicts of interest due to the dual role of institutional shareholders as investors and sub-underwriters. On the other hand, the ownership size of large shareholders and the reputation of underwriters have a moderating effect on fees, while the nationality of the institutional shareholders, the concentration of the investment bank industry and the experience of corporate issuers are not related to underwriting fees.     

Underwriting relationships: Information production costs, underwriting fees, and first mover advantage

We study underwriting relationships in the floating rate debt market, where many issuers have a large number of offerings. We find that frequent issuers maintain close relationship with only three to five underwriters and pay significantly less underwriting fees than infrequent issuers. The findings are consistent with the notion that starting an underwriting relationship requires expenses for information production. We also find that an issuer’s first underwriter has a cost advantage over later-comers in competing for the issuer’s business. As a result, the first underwriter wins a larger share of the issuer’s business. JEL Classification G21 · G24     

Auditor quality,corporate risk,and the valuation of new issues

This paper tests two hypotheses derived from the Data et al. (1991) theoretical model of auditor choice by companies newly listing on the stock exchange. The results offer support to their predictions of the demand for auditor quality. In particular, higher-risk companies are associated with the selection of a high-quality auditor, as proxied by a Big Eight firm of accountants. Additionally, companies who employed Big Eight firms had higher market valuations of their stock at the time of listing.     

The direct costs of UK rights issues and open offers

The paper describes selling and underwriting procedures in rights issues and open offers, and analyses the costs of issue reported in prospectuses, including the substantial costs which are not for underwriting. The impression is often given that costs are fixed at 2 % of gross proceeds, but they vary and average 5.78 %(median 4.28 %). Controlling for economies of scale and fees not related to the issue, costs increase with the proportion of the issue underwritten and with the depth of discount, and decrease with the proportion of the company owned by large shareholders.     

Information quality and the valuation of new issues

The prevailing belief in the marketplace holds that the choices of auditor and investment banker affect the price of an initial public offering. This belief reflects the idea that the auditor and investment banker quality provides information about the firm's true value. This paper presents a model giving this belief theoretical support. Under plausible conditions, it is shown that an entrepreneur with favorable information about his firm's value chooses a higher-quality auditor and investment banker than an entrepreneur with less favorable information. As a result, firm value is an increasing function of auditor and investment banker quality.     

Accounting for human rights: The challenge of globalization and foreign investment agreements

The triumph of neoliberalism has promoted trade and investment as the dominant routes to economic and social development. This has further enhanced the power of transnational corporations. Developing countries are increasingly expected to secure foreign investment to stimulate their economies and lift the local population out of poverty. However, foreign investment also has implications for protection and enjoyment of human rights. Transnational corporations manage their risks by imposing stabilization clauses on host countries that constrain their ability to protect and enhance human rights. Conventional accounting and corporate social responsibility reports seem to be unable to respond to the emerging agenda on human rights. This paper seeks to stimulate debates about the protection and enjoyment of human rights by drawing attention to the way corporations constrain governments and people through clauses in investment agreements. Some evidence is provided through an examination of an investment agreement relating to the Chad–Cameroon oil and pipeline project. The paper calls for the production of counter accounts to challenge the hegemony of corporations and create spaces for the enjoyment of human rights.     

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.     

International market segmentation and Eurodebt issues

Implications of capital market segmentation for international capital structure (ICS)—capital structure consisting of equity issued in one country and debt issued in another—are examined. Necessary conditions for the emergence of ICS are analyzed under two options for debt issues (foreign debt and Eurodebt) and comparisons are made. It is shown that in cases where the project cannot support an ICS including foreign debt Eurobonds can be issued and would be profitable.     

Relationship Banking and the Pricing of Financial Services

We investigate pricing effects of the joint production of loans and security underwritings. We control for firm and borrower characteristics, including differences in sequencing, which are important for pricing. Contrary to previous studies, when banks combine lending and underwriting within the same customer relationship they charge premiums for both loans and underwriting services. Abstracting from effects of joint production within relationships, depository banks engaged in underwriting price lending and underwriting more cheaply than stand alone investment banks. One advantage borrowers enjoy from bundling products within a banking relationship is a form of liquidity risk insurance, which is manifested in a reduced demand for lines of credit. We also find evidence of a “road show” effect; firms enjoy loan pricing discounts on loans that are negotiated at times close to the debt underwritings, whether or not the same bank provides both services. Relationship effects are only visible when lending and underwriting both occur, and are stronger for equity-loan relationships than for debt-loan relationships. Electronic supplementary material  The online version of this article (doi:) contains supplementary material, which is available to authorized users.

Advantageous innovation and imitation in the underwriting market for corporate securities

Investment banks that develop new corporate securities systematically lead the new underwriting market despite being imitated early by equally competitive rivals. We study how innovators and imitators set underwriting fees in order to identify empirically the source of this advantage. Using data of innovative securities since 1985, we do find that innovators set systematically higher fees than imitators. This premium decreases as more issues occur, and faster for later generation products. Imitation is also quicker for later generations. This evidence supports the hypothesis that the innovator has superior skills in structuring any given issue of the new security.     

Long-run performance of Spanish seasoned equity issues with rights

This paper analyzes the long-run effect on shareholders' wealth and firms' operating performance of the right offering decision in Spain. The evidence shows that the stock price of firms' issuing rights substantially underperform the different benchmarks employed. It has also been observed that these companies experience a decrease in accounting profitability for some pre- to postissue periods. An excessive optimism about the long-term prospects of equity issuers could explain these results.     

Equity issues and aggregate market returns under information asymmetry

We propose a simple time-series model based on information asymmetry that allows us to test the predictive power of equity and debt issues with respect to future market returns. Using this method, we find that managers’ new equity and debt issue decisions have predictive power for future market returns, when we take into account potential feedback from past market returns and structural breaks. We also take into account a cointegration relation among stock prices, equity issues and debt issues. This finding is robust with respect to various measures of market returns and consistent with the managerial timing hypothesis.     

On the importance of retail banking relationships

We use proprietary data to analyze the importance of retail banking relationships to commercial banks and their depositors when banks underwrite securities. We find lead underwriters’ retail customers benefit as they demand and end up with significantly more of the highly underpriced issues. We find it is actual underpricing beyond that predicted by grey markets that drive the differential demand from the lead bank retail clientele, suggesting that banks pass on information about underpriced initial public offerings to their retail depositors. We analyze banks’ incentives for such behavior and find evidence of banks benefiting through retail cross-selling—both brokerage accounts and consumer loans increase significantly.