Stock offerings in a different institutional setting: The Swiss case, 1973–1983

This paper analyzes the stock price effect of equity issues in Switzerland. There, insiders are not legally prevented from using their information for personal trades, and security offerings are with almost no exception rights issues. Unlike what we find for a comprehensive sample of U.S. rights issues and a sample of U.S. general cash offerings, a significant majority of firms experiences a positive monthly announcement effect. The average abnormal return itself, however, is not significant. Also, we find evidence inconsistent with infinitely price-elastic demand functions for common stock, as well as some evidence that offer prices convey new information.     

Market reaction to “unsweetened” and “sweetened” rights offerings in an emerging European stock market

This research investigates the market reaction to both “unsweetened” (plain) and “sweetened” (with simultaneous distribution of bonus issues) rights offerings in the Istanbul Stock Exchange. Consistent with previous U.K. and U.S. evidence, although with larger magnitude, the announcement day abnormal returns for “unsweetened” rights offerings are negative and significant, suggesting that such issues convey unfavorable information about the future operating performance, investment opportunities, liquidity and dividend policy. In contrast, for “sweetened” rights offerings, the abnormal returns are positive. The empirical results do not provide evidence for the enhanced trading liquidity effect (the “sweetener” split effect) and for the overvaluation signaling effect.     

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.     

Seasoned Equity Issuance by Japan and Singapore REITs

This paper examines the effects of market conditions and asset acquisitions on announcement returns and the probability of equity offerings by REITs in Japan and Singapore. The Asian experience is interesting given the prevalence of yield accretive strategies, but more so, we establish that past acquisitions have a significant effect on the probability of equity offering, over and beyond the effect of debt and market conditions. A contemporaneous acquisition announcement mitigates the negative price effect of the SEO announcement. We also find that equity clustering affects market reaction and SEO issuance.     

Revisiting corporate dividends and seasoned equity issues

Information signaling is regarded as an important motivating factor in corporate payout decisions, particularly with regard to cash dividends and the costly information signaling which they provide. Although Loderer and Mauer (1992) find little evidence to suggest that the announcements of firms’ equity offers are timed to arrive just after dividend declarations as a means of supporting the offer price. Using updated data, we determine that the dividend declaration does have a positive effect on the market reaction to equity offering announcements. We find that the abnormal returns from the announcement of seasoned equity offerings (SEOs) were −1.45 per cent for those SEO firms which had already made dividend declarations, whereas the returns for those SEO firms where the equity issue did not immediately follow a dividend declaration were −1.83 per cent. In this study, we interpret the changes in the impact of the dividend declaration on the equity offering announcement using the ‘tax regulation hypothesis’ and the ‘information asymmetry hypothesis’, and find that while our empirical results provide strong support for the latter, they provide only weak support for the former.     

DIVIDEND CHANGE ANNOUNCEMENT EFFECTS AND EARNINGS VOLATILITY AND TIMING

Recent modeling using the asymmetric information framework suggests that the magnitude of a market response to dividend change announcements should be related to the timing of the dividend announcement vis-a-vis the earnings release and to the stability of those earnings. The announcement effects of regular quarterly dividend changes are tested and these effects are related to the percentage change in the dividend yield, to the stability of the firm's earnings, to the timing of dividend and earnings announcements, and to the level of earnings compared with prior quarters. Analysis indicates that significant relationships exist between the announcement effect and changes in the dividend yield, and whether the dividend change is positive or negative. Only weak evidence exists that dividend announcement effects are larger when current earnings are unknown.     

The impact of informed trading on dividend signaling: a theoretical and empirical examination

This paper examines how the trading behavior of various investors impacts the market reaction to a dividend signal. The dividend signaling model incorporates asymmetric information among traders, firm insiders, and the market. This interaction among market participants explains why not all dividend increases are viewed by the market as good news. The model predicts that the announcement day returns for a dividend increase are inversely related to measures of informed trading and decreasing in the level of buy demand relative to sell demand. Further, the model hypothesizes that more informed trading results in larger dividend increases. Empirical tests confirm these predictions.     

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.     

The information content of insider trading around seasoned equity offerings

This paper examines insider trading around seasoned equity offering (SEO) announcements in Hong Kong. The announcements of private placings (rights offerings) are associated with positive (negative) abnormal stock returns. However, longer-term stock returns are negative for both private placings and rights offerings. In general, insiders are net purchasers in placing firms in the 6 months prior to and 6 months subsequent to the SEO, whereas insiders are net sellers in rights issue firms in the 6 months prior to and 6 months subsequent to the issue. The net purchases made by the insiders of firms making placements help them maintain their control rights, which are otherwise diluted by the placements. Insider trading does not explain longer-term investment returns.     

An agency theory explanation of SEO underperformance: Evidence from dual-class firms

Using a sample of U.S. dual class companies, we empirically investigate the effects of the divergence between insiders’ voting and cash flow rights on market reaction to seasoned equity offerings (SEOs) and long-run stock performance following SEOs. We find that SEO announcement returns and long-run stock performance following SEOs are negatively related to measures of the divergence between insiders’ voting and cash flow rights. Our results support the view of agency theory as a plausible explanation of SEO underperformance. Misalignment of interests between insiders and outside shareholders can create managerial incentives to undertake value-destroying investments to extract private benefits, ultimately leading to a reduction in firm value.     

EVIDENCE OF A RELATION BETWEEN STOCK PRICE REACTIONS AROUND CASH DIVIDEND CHANGES AND YIELDS

Here, the relation between stock price reactions to announced dividend changes and the yields of the underlying securities is examined. A significant positive (negative) relationship is detected between announcement date returns and yield for dividend increases (decreases) even after controlling for the magnitude of the dividend change. Price reactions associated with dividend increases vary directly with the change in yield and, on average, low-yielding companies do not experience abnormal returns when they increase their dividends. Implied in these results is that the information conveyed through dividend changes varies with the yield of the underlying security and the market response is a function of factors beyond the pure information effect.     

Good growth,bad growth: Market reaction to capital raising for REIT expansion

When a firm issues security to finance its growth, how does the market react and do investors differentiate between good and bad growth? By manually reading the intended use of proceeds of each security offering of U.S. REITs during 2000–2020, we classify whether the proceeds are used for expansionary or other purposes and analyze whether security offerings that are used to finance sub-optimal growth matter for shareholders' wealth. Adopting an event study method, we find that the expansionary use of proceeds does not affect shareholders' wealth following a debt offering announcement. However, when we distinguish good growth from bad growth, we find that debt financing used for good growth is associated with an increase in shareholders' wealth (+1.734% abnormal return in the 5-day event window) and debt financing used for bad growth is associated with a decrease in shareholders' wealth (−0.563% abnormal return in the 5-day event window). For equity offering announcements, on average, neither the expansionary use of proceeds nor the nature of growth significantly affects shareholder wealth.     

The Chinese Stock Dividend Puzzle

In this paper, we examine the announcement effects of dividends with an emphasis on stock dividends in China's capital market. We find that dividend-paying stocks exhibit significantly positive abnormal returns while non-dividend-paying stocks show a negative announcement effect. Further, we document that the cumulative abnormal returns for pure stock dividends and combined dividends are the main drivers of this announcement effect. In contrast, pure cash dividend stocks experience no significant price run-up before announcement. The significant announcement effect of stock dividends is robust to controlling the earnings surprise effect. We offer some discussion of the possible explanations.     

INFORMATION ASYMMETRY,DIVIDEND STATUS,AND SEO ANNOUNCEMENT‐DAY RETURNS

We analyze the relation between the dividend‐paying status of a firm and the seasoned equity offering (SEO) announcement‐day return. Asymmetric information theory suggests there should be a positive relation: the larger the disagreement, particularly between managers and shareholders, the larger the price drop on the SEO announcement day. However, this theoretical result has not been supported by prior empirical research. In this article we reconcile the gap between the theory and extant empirical results by identifying a structural change in the way the stock market treats dividend‐paying firms. Since the mid‐1980s the difference in information asymmetry between dividend‐ and non‐dividend‐paying firms has increased sharply. As a result, before the mid‐1980s the market did not differentiate strongly between them, but subsequently the market has reacted less negatively to announcements by dividend payers.     

Underpricing,Share Overhang,and Insider Selling in Follow‐on Offerings

Prospect and information‐momentum theories predict that insiders can offer fewer shares in an initial public offering (IPO) to create informational momentum and obtain higher prices in follow‐on offerings. I find that dilution and insider participation in the IPO are negatively related to the number and size of follow‐on offerings, consistent with the prediction. However, insider selling in follow‐on offerings is positively related to IPO selling, contrary to the theories. Returns around follow‐on offering announcements are more negative for newly public firms than older firms, but for newly public firms do not differ by whether the announcement comes before or after the lockup expiration date.     

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

This paper examines seasoned equity offerings in France. Eventhough a rights offering is the primary flotation method, Frenchcompanies are increasingly using the relatively expensive publicoffering method. We show that the market reaction to the announcementof seasoned equity issues is significantly negative for rightsissues and insignificantly negative for public offerings. Ourresults suggest that the adverse selection effect is greaterfor rights issues than for public offerings, due to strongerunderwriter certification for the public offerings. We findthat the share price effect is positively related to blockholderstake-up renouncements for firms with prior concentrated ownership.For these firms, the favourable ownership dispersion effectoffsets the adverse selection effect. JEL Classification: G32,G14 and D80.     

Stock price effects and costs of secondary distributions

This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.     

Information spillovers around seasoned equity offerings

We examine information spillovers in the context of seasoned equity offerings (SEOs). Rival firms react significantly positively (0.26%) to primary SEO announcements, indicative of a competitive effect, but negatively (− 0.35%) to secondary share announcements, which is evidence of a contagion effect. Consistent with the view that primary equity offerings signal favorable industry prospects because firms presumably issue new shares to invest in profitable projects, we find that the rival response is positively related to analysts' EPS growth forecasts. However, when insiders are selling their shares through a secondary offer, this may suggest overvaluation and thus negatively impacts rival firms. Consistent with this view, we find when VCs sell through a secondary offerings, rivals experience a more significant negative reaction. We find rival firms are more likely to follow their peers and conduct a primary SEO if the market reacts favorably to their peer's SEO announcement. Finally, rival firms outperform secondary share issuers of equity, but not primary share issuers. Collectively, the findings support the view that insiders take advantage of windows of opportunity when they sell their own shares, but not when they raise capital for investing purposes.