International equities listed on the New York stock exchange: does type of issue or date of issue matter?

The initial short-term (21-day) and long-term (3-year) excess returns for foreign initial public offering (IPO) and seasoned equity offering (SEO) American depository receipts (ADRs) listed on the New York stock exchange from 1990 to 2009 are tested to determine differences in performance based on type of issue and date of issue for the decades of the 1990s and the 2000s. The overall sample outperformed the S&P 500 Index by over 5?% after the first 3?years of trading; however, SEO ADRs outperformed IPO ADRs by nearly 19?% (relative to the market index). Breaking IPO and SEO ADR returns down by decade of issue shows that those listed in the 2000s for both samples drastically outperformed those listed in the 1990s in the long term. Both samples of ADRs listed in the 2000s also significantly outperformed the S&P 500 index in the first 36?months of trading. In the short-term results, for the first 21?days of trading, the SEO ADRs significantly outperformed the market by 2.1?%, while IPO ADRs outperformed by 0.97?% (though not significant).     

The Timing and Subsequent Performance of Initial Public Offerings (IPOs) on the Johannesburg Stock Exchange

Companies that have listed on the Johannesburg Stock Exchange by means of a public offering between 1980 and 1991 have subsequently performed poorly. This long run post issue performance is remarkably consistent with the South African evidence for seasoned rights issuing companies and the international evidence for both initial public offerings (IPOs) and seasoned equity offerings (SEOs). Over the four years post issue, the newly listed companies earned an average return of 18.0% as opposed to 81.5% for a size-matched sample of seasoned companies. This study adds to the increasing body of international evidence suggesting the IPO under performance 'puzzle' referred to by Ibbotson (1975), Loughran and Ritter (1995) and Spiess and Affleck-Graves (1995) is not simply sample or country specific.     

Real Earnings Management,Liquidity Risk and REITs SEO Dynamics

We analyze how REITs managers use real earnin gs management to address issues of liquidity risk and increased cost of capital they face during seasoned equity offerings. We show that REITs managers engage in real earnings management instead of accrual earnings management to attract more uninformed trading in order to provide the liquidity service at a lower cost during seasoned equity offerings. We find REITs with higher liquidity risk are more likely to manipulate earnings prior to equity offerings and uninformed trading is higher following real earnings management. Firms set the offer price at a smaller discount after engaging in real earnings management and stock returns decline in the long run. The findings are consistent with real option and liquidity risk explanations for equity offerings.     

Return spread and liquidity: Evidence from Hong Kong ADRs

Fifteen Chinese H-shares listed on the Stock Exchange of Hong Kong are cross listed as ADRs on the NYSE. We empirically determine the role of security specific liquidity associated with those ADRs and their underlying H-shares on return spreads, differences between the returns on ADRs and their corresponding H-shares after controlling for ADRs and H-shares excess market returns and their respective price inverses denoting conditional betas. We use three proxies for liquidity, trading volume, turnover, and illiquidity (Amihud, 2002) and find that only trading volume and turnover are consistent determinants of return spread for the majority of Chinese ADRs with primary listing in Hong Kong Stock Exchange (SEHK). We use a switching regression model and find that the model parameter estimates are not stationary and change, often drastically between pre and post 2000 and 2003. Further tests using Bai Perron indicate return spreads data as non-stationary with multiple regime changes during the sample period. Further the causes of non-stationarity seem to be largely security specific and not driven by broad market swings in either market.     

Can a stock exchange improve corporate behavior? Evidence from firms' migration to premium listings in Brazil

Because Brazil's legal system lacked protection for minority shareholders and trading of Brazilian shares flowed to U.S. exchanges, in 2001 the São Paulo Stock Exchange, Bovespa, created three premium exchange listings that require more stringent shareholder protections. This paper examines the effects of a commitment to improved corporate disclosure and governance by firms' voluntary migration to these premium listings. Our analysis finds that a firm's migration brings positive abnormal returns to its shareholders, particularly when its shares did not have a prior cross-listing on a U.S. exchange and also when the firm chooses a premium listing with the highest standards. Migration to a premium listing also leads to a significant increase in the trading volume of non-voting shares. Firms that choose a premium listing tend to have growth opportunities that they finance with subsequent seasoned equity offerings. These results suggest that a premium listing is a mechanism for bonding to improved corporate behavior that can be less costly than cross-listing on a U.S. exchange.     

Price discovery and the international flow of information

We document that the opening volatility of American depositary receipts (ADRs) is lower when the trading of the underlying asset overlaps trading of the ADR on the New York Stock Exchange (NYSE). This lower volatility is consistent with the notion that price discovery on the NYSE is enhanced by concurrent trading in the underlying market. We also find that ADR volatility does not change when the underlying market closes, indicating that there is no significant change in the flow of public and private information at that time. This finding suggests that the NYSE becomes the dominant market during periods when both ADRs and their underlying assets are traded.     

Venture capital trusts and the expiration of IPO lock-up provisions

Venture capital trusts (VCTs) were introduced to provide private equity capital for small expanding companies and to promote innovation. Investors in initial public offerings are rewarded with tax relief on the cost of lock-up provisions to stabilize the market. This paper examines the market reaction and trading activity around the expiration of lock-up provisions of 148 VCTs listed on the London Stock Exchange from 1995 to 2006. Downward-sloping demand curve theory suggests that an increased supply of VCT shares at the expiry date could shift their value to a new equilibrium at a lower price. Supporting this prediction, we document evidence of negative abnormal returns as well as permanent increases in the price discount relative to net asset value and trading volumes at and around the expiries of the required holding periods of VCTs. In addition, less negative abnormal returns, lower abnormal discounts and lower abnormal trading volumes are associated with VCTs that invest in AIM-listed companies due to lower information asymmetry, that experience lower prior performance due to a less pronounced disposition effect, and that are subject to a shorter lock-up horizon or are offering more generous tax benefits.     

Investment performance of “environmentally-friendly” firms and their initial public offers and seasoned equity offers

We employ a sample of 748 environmentally-friendly (or “green”) firms listed on U.S. stock exchanges to extend studies of the effects of socially responsible investment (SRI) on stock investment returns and the performance of initial public offerings (IPOs) and seasoned equity offerings (SEOs). Our empirical tests document positive and statistically significant excess returns for our environmentally-friendly firms and their IPOs and SEOs, in contrast to our control IPO and SEO samples which underperform. In summary, a “green” equity premium is evident in returns calculated from a variety of benchmarks.     

The Performance of Private Equity‐Backed IPOs

My paper examines the aftermarket performance of private equity‐backed initial public offerings (IPOs) and compares it to the performances of equivalent samples of venture capital‐backed and other nonsponsored issues on the London Stock Exchange during the period 1992‐2005. The evidence suggests marked differences across the three groups in terms of market size, industry classification, first‐day returns, and key operating characteristics at the time of flotation. In fact, private equity‐backed IPOs are larger firms in terms of sales and assets, more profitable, and relatively modest first‐day returns. In the three years following the public listing, they display better operating and market performance when compared to other IPOs and the market as a whole.     

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.     

The Pricing of Initial Offerings of Privatised Companies on the London Stock Exchange

This paper investigates UK privatisation issues as initial public offerings (IPOs) of equities on the International Stock Exchange (London). Excess returns on such issues are compared with private sector initial public offerings. The results, which are unaffected by firm size and underwriting commission, indicate that, on an ex post basis, the issues provide excess returns above those of private sector firms on average by about 31% over a 32-week period. None of the existing theories of underpricing of IPOs is consistent with our results which imply wealth transfer to those who acquired the shares in privatised issues. After-market pricing was, however, found to be consistent with secondary market efficiency.     

Market timing wealth effects of American Depository Receipts: The cases of emerging and developed market issues

We examine the long-term returns of a sample of foreign equities traded on the New York Stock Exchange as American Depository Receipts (ADRs) issued between January 1, 1987 and September 30, 2000. Distinctions are made between those ADRs issued by companies headquartered in emerging and developed markets and those ADRs issued before and after January 1, 1998. The results suggest that, on average, emerging market ADRs issued prior to January 1, 1998 underperform the S&P 500 in long-term holding periods, while those issued after January 1, 1998 outperform the S&P 500. Alternatively, developed market ADRs slightly underperform the S&P 500 in long-term holding periods regardless of date of issue.     

Firm characteristics and long-run stock returns after corporate events

The well-documented abnormal long-run buy-and-hold returns to firms issuing equity in initial public offerings and seasoned equity offerings, firms bidding in mergers, and firms initiating dividends can be attributed to imperfect control-firm matching. In addition to firm size and market-to-book ratio, event firms on average differ from control firms in terms of idiosyncratic volatility, liquidity, return momentum, and capital investment, each of which also explains returns. We propose a simple regression-based approach to control for differences in firm characteristics across event and control firms, and we show that long-run abnormal returns do not differ significantly from zero for event firms in the 1980 to 2005 period. The returns to event firms are, therefore, consistent with patterns known to exist for the broad stock market and do not require event-specific explanations.     

An Investigation on Information Transmission Between Stocks of Far Eastern Countries and Their American Depositary Receipts

Domestic stocks and their American depositary receipts (ADRs) are essentially twin securities listed in the home country and United States, respectively. Accounting for exchange rates and market friction, their prices should move in tandem if international markets are efficient. In reality, however, their returns are close but sometimes differ dramatically. This study hypothesizes that changes in trading volume and macro events can lead investors between two equity markets to generate heterogeneous expectations or interpretations, causing returns on one security to deviate from those on the other. The results show that changes in past domestic volume do affect current ADR returns, implying that volume contains additional information not in prices. It is also found that important macro events, especially bad news, trigger significant differences in returns between domestic shares and their ADRs. These results support our argument that heterogeneous expectations prolong price information transmission between two equity markets.     

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.     

Endogenous Events and Long-Run Returns

We analyze event abnormal returns when returns predict events.In fixed samples, we show that the expected abnormal returnis negative and becomes more negative as the holding periodincreases. Asymptotically, abnormal returns converge to zeroprovided that the process of the number of events is stationary.Nonstationarity in the process of the number of events is neededto generate a large negative bias. We present theory and simulationsfor the specific case of a lognormal model to characterize themagnitude of the small-sample bias. We illustrate the theoryby analyzing long-term returns after initial public offerings(IPOs) and seasoned equity offerings (SEOs).     

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.     

ON ESTIMATING STOCK MARKET VOLATILITY: AN EXPLORATORY APPROACH

Traditional methods of estimating market volatility use daily return observations from a stock index to calculate monthly variance. We break with tradition and estimate stock market volatility using the daily, cross-sectional standard deviation of returns for all firms trading on the New York Stock Exchange and the American Stock Exchange. We find a significantly positive relation between risk and return. Market volatility is estimated to be about half the volatility level previously reported. The intraday, cross-sectional market volatility measure provides findings consistent with risk-return theory.     

Corporate Events,Trading Activity,and the Estimation of Systematic Risk: Evidence From Equity Offerings and Share Repurchases

We investigate the relation between trading activity, the measurement of security returns, and the evolution of security prices by examining estimates of systematic risk surrounding equity offerings and share repurchases. In contrast to prior studies, we find no evidence of changes in systematic risk following either equity offerings or share repurchases after correcting for biases caused by infrequent trading and price adjustment delays. Moreover, changes in ordinary least squares beta estimates are significantly related to contemporaneous changes in trading activity. Our results have implications for studies interested in the properties of security returns, particularly those examining periods in which trading activity changes.     

Short- and Long-Term Performance of Polish IPOs

The paper documents short- and long-run performance of initial public offerings on the Warsaw Stock Exchange from 1998 to 2008. The study reveals positive initial market-adjusted returns of 13.95 percent and significant long-term underperformance with mean of -22.62 percent for the three-year buy-and-hold strategy. We introduce ordinary least squares regressions to find determinants of initial returns. Our findings document strong explanatory power of early aftermarket volatility, issuer's size, growth opportunities, and profitability before the offering. Moreover, those variables that can partly explain differences in initial returns can also help to shed light on the long-term underperformance issue. Our results are thus consistent with Miller's (1977) divergence of opinion hypothesis.