Understanding seasoned equity offerings of Chinese firms

We examine the empirical relevance of standard theories explaining the motivation of Seasoned Equity Offerings (SEOs) in the Chinese context. Analyzing Chinese SEOs during 1994-2008 and controlling for other factors reflecting features of Chinese corporate finance, we find that Chinese SEOs are mostly motivated by timing the market. Financing for investment and growth receives weak empirical support. We do not obtain any consistent evidence supporting both the tradeoff and the agency theories. In addition, we find that the firm’s SEOs behavior varies between rights issues and public offerings and across different periods along with the progress of China’s market transition. Our results show that Chinese listed firms in general behave similarly as their counterparts in other countries concerning SEOs decisions in that they issue SEOs when there are opportunities to take advantage of market overvaluation. These results are consistent with the well-documented convergence trend of corporate SEOs behavior of firms around the world. In addition, our findings challenge the conventional perception on Chinese SEOs that controlling shareholders use SEOs as a means to expropriate minority shareholders.     

Behavior of liquidity and returns around Canadian seasoned equity offerings

Spread costs and their adverse selection and temporary components for Canadian SEOs follow an approximate V-shaped pattern with a trough at the closing window. Enhanced ownership diffusion partly explains the decrease in these spread costs post-SEO completion versus pre-SEO announcement. SEO spread costs decrease after the April 1996 TSX decimalization. The adverse selection cost of privately-placed Canadian SEOs decreases after Multilateral Instrument 45-102 reduced the lock-up period to four months in 2001. Consistent with results for non-US SEOs, negative abnormal returns (ARs) occur in announcement windows for undifferentiated SEOs. ARs are significantly different for public (significantly negative) versus private (insignificantly positive) SEOs consistent with their associated differential reductions in information asymmetry. Conditional residual volatilities decrease post-announcement, consistent with a diminished temporary spread cost and expected behavior following an unanticipated event.     

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.     

The marketing of seasoned equity offerings

In an accelerated seasoned equity offering (SEO), an issuer foregoes the investment bank's marketing efforts in return for a lower fee. To explain why many issuing firms choose a higher cost fully marketed offer, we posit that the marketing effort flattens the issuer's short-run demand curve. Alternatively stated, with a fully marketed offer, the issuer is paying investment bankers to create demand, making the elasticity of demand at the time of issuance an endogenous choice variable. Empirical analysis shows that both the pre-issue elasticity of the issuing firm's demand curve and the offer size are important determinants of the offer method choice. We find evidence of a large transitory increase in the elasticity of demand for issuers conducting fully marketed SEOs.     

Audit quality and seasoned equity offerings methods

Using a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we document that audit quality is associated with SEO issuance method choice. Specifically, firms with higher quality auditors are more likely to adopt the accelerated offerings issue method instead of using other seasoned equity offering methods. We also identify that audit tenure and industry audit specialization influence the relation between audit quality and the likelihood of undertaking accelerated SEO offerings, and that the relationship is more pronounced in the presence of weaker firm-level information and governance environments. Extending from the conclusion that accelerated offerings serve as a quality certification mechanism, we also find that firms completing accelerated offerings enjoy lower audit fees in subsequent years. These firms also exhibit superior post-SEO-issue long-term abnormal stock performance. Overall, our study shows that the certifying and monitoring role of auditors is valuable to clients, underwriters, and investors in SEO transactions.     

Policy uncertainty and seasoned equity offerings methods

Based on a sample of U.S. seasoned equity offering (SEO) during the period 2002–2017, we examine how the choice of equity issuance method changes in response to policy uncertainty. We find that firms subject to high policy uncertainty are less likely to use accelerated offerings rather than other types of traditional seasoned equity offerings. Our results are robust to alternative variable specifications, propensity score matching method, IV approach, and the inclusion of additional controls. Also, the effect of policy uncertainty on accelerated offering decision is weaker for firms with better information environment, earnings quality, and governance structures. Further, policy uncertainty increases the cost of funds and lowers long-run abnormal returns after SEOs for firms subject to high levels of policy uncertainty.     

The role of institutional investors in seasoned equity offerings

Do institutional investors possess private information about seasoned equity offerings (SEOs)? If so, do they use this private information to trade in a direction opposite to this information (a manipulative trading role) or in the same direction (an information production role)? We use a large sample of transaction-level institutional trading data to distinguish between these two roles of institutional investors. We explicitly identify institutional SEO allocations for the first time in the literature. We analyze the consequences of the private information possessed by institutional investors for SEO share allocation, institutional trading before and after the SEO and realized trading profitability, and the SEO discount. We find that institutions are able to identify and obtain more allocations in SEOs with better long-run stock returns, they trade in the same direction as their private information, and their post-SEO trading significantly outperforms a naive buy-and-hold trading strategy. Further, more pre-offer institutional net buying and larger institutional SEO allocations are associated with a smaller SEO discount. Overall, our results are consistent with institutions possessing private information about SEOs and with an information production instead of a manipulative trading role for institutional investors in SEOs.     

Influence of media coverage and sentiment on seasoned equity offerings

This article examines the role of media in seasoned equity offerings (SEOs) price and market reactions on SEO announcements. Using a sample of SEO deals in UK, we find that media coverage is significantly and negatively related to SEO price discounts and market returns around SEO announcements. Moreover, we document that more pessimistic media sentiment predicts larger SEO price discounts and more negative market reactions to SEO announcements. In summary, both media coverage and media sentiment influence investor decisions in SEOs, but through different mechanisms.     

Propensity score matching and abnormal performance after seasoned equity offerings

The long-run underperformance of stocks after seasoned equity offerings (SEOs) is a major challenge to the efficient market hypothesis. We reexamine the SEO underperformance anomaly using the propensity score matching method on a sample of around 2000 offerings between 1986 and 1998. While underperformance characterizes equal-weight and buy-and-hold returns if traditional matching methods are used, the underperformance is economically and statistically insignificant when we match issuers to non-issuers by propensity scores. Our results suggest that SEO underperformance manifests statistical inadequacies of traditional matching methods rather than an anomaly challenging the efficient market hypothesis.     

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.     

Financial restatements by Canadian firms cross-listed and not cross-listed in the U.S.

Canadian financial restatements announced during 1997–2006 lower market quality and signal to market participants that expected future cash flows and their uncertainty are diminished and increased, respectively. Abnormal returns are related to downward revisions in consensus earnings forecasts, and become more negative for U.S. cross-listings, and for revenue recognition and company-initiated restatements. Total residual volatility, its information-based permanent component and the adverse selection spread component increase following such announcements. Relative spreads and a spread-depth market-quality index increase following such announcements and are lower for U.S. cross-listings. Relative spreads (unlike the market-quality index) remain higher post-announcement, and are lower post-Sarbanes-Oxley Act.     

The announcement impact of seasoned equity offerings on bondholder wealth

Previous studies document a negative return to equity on the announcement of an SEO. However, the effects of SEO announcements on bonds have received little attention. We find that bondholders experience a significant positive return on the announcement of an SEO and this effect is more pronounced for bonds with lower ratings. We examine alternate explanations for bond market reactions to SEO announcements including the leverage risk reduction, wealth transfer, and information signaling hypotheses. Overall, our results are most consistent with the leverage risk reduction hypothesis.     

Why do companies include warrants in seasoned equity offerings?

We analyze the reasons why companies issue units when they raise additional capital. We find that, in contrast to previous evidence, units are not offered to mitigate the agency conflicts or to signal security mispricing as they are predominantly issued during cold periods, in public rather than in rights offerings, and when the issue is underwritten. In addition, the results indicate that companies choose to offer units to increase their offer price flexibility and to underprice their seasoned equity offering so as to minimize the issue cost and the risk of failure of the issue. These results provide support for the net proceeds maximization hypothesis.     

Firm diversification and earnings management: evidence from seasoned equity offerings

Popular press suggests that diversified firms are more aggressive in managing earnings than non-diversified firms. We examine this claim in the seasoned equity offering (SEO) setting, where firms have been shown to have the incentive to manage earnings upwards. Using the cross-sectional modified Jones [(1991) J Accounting Res 29:193–228] model to measure discretionary current accruals, we find that discretionary current accruals are higher among diversified firms than in non-diversified ones. Our evidence is consistent with the view that the extent of firm diversification is directly related to the degree of earnings management. We further show that diversified issuers with high discretionary accruals underperformed other SEO firms.

Underwriter choice and earnings management: evidence from seasoned equity offerings

Using a sample of seasoned equity offerings (SEOs), this paper examines the association between the choice of financial intermediary and earnings management. We contend that with more stringent standards for certification and intense monitoring, highly prestigious underwriters restrict firms’ incentives for earnings management to protect their reputation and to avoid potential litigation risks, while firms with greater incentives for earnings management avoid strict monitoring by choosing low-quality underwriters. Consistent with our predictions, we find an inverse association between underwriter quality and issuers’ earnings management. In addition, we find that underwriter quality is positively related to SEOs’ post-issue performance, even after controlling for the effect of earnings management. We also find that firms with low-underwriter prestige and high levels of earnings management under-perform the most. However, the effect of underwriter choice on post-issue performance does not last long.

Long-run stock performance of German initial public offerings and seasoned equity issues

We estimate the long-run stock performance after initial public offerings (IPOs) in the German capital market with a larger sample than prior studies and alternative benchmarks (the equally and the value-weighted market portfolio, size portfolios and matching stocks). In addition we present the first results on the long-run performance after seasoned equity issues (SEOs) in Germany. We conclude that size portfolios and matching stocks are better benchmarks than market portfolios. Using buy‐and-hold abnormal returns, we estimate that German stocks involved in an IPO or in a SEO, on average, underperform a portfolio consisting of stocks with a similar market capitalization by 6% in three years. This is considerably less than the underperformance after IPOs and SEOs in the US market reported by Loughran and Ritter (1995) and the underperformance after IPOs in Germany reported by Ljungqvist (1997). We also show that the apparent underperformance of the 1988–1990 IPO cohort discussed by Ljungqvist (1997) disappears when the abnormal performance estimate is based on size instead of market portfolios.     

Earnings management of seasoned equity offering firms in Korea

We investigated 249 Korean seasoned equity offering (SEO) firms during the period 1995-1997 to determine if the SEO firms manage earnings in the year before a planned issue of seasoned equity stocks. Using three test methods (accrual difference, correlation, and sign-change), we found that the Korean firms contemplating SEOs in the following year do manage earnings particularly when their relative performances have been poor. The results are robust irrespective of control samples. Analysis of operating performances around SEOs shows that SEO firms tend to increase reported earnings in the year immediately preceding and the year of SEOs, but no differences were found in operating cash flows between the SEO firms and the control firms. By using a regression analysis for discretionary accruals, we found that SEO firms are more likely to manage earnings if the operating performances are poor and if the offer sizes are relatively large. Association tests between stock returns and discretionary accruals indicate that the market reacts positively to net income but negatively to discretionary accruals. The results indicate that the market correctly analyzes the cash flow implications of the SEO firms' opportunistic use of discretionary accruals.     

First-move advantage in seasoned equity offerings: Evidence from European banks

The financial crisis that started in 2008 has generated significant losses for European banks, forcing them to undertake a series of seasoned equity offerings (SEOs) to reinforce their balance sheets in order to comply with regulatory capital requirements. As a result, they have produced repeated SEO waves in a relatively short time frame, when capital supply was limited due to the economic and financial context. We investigate the conditions at which European banks have been able to raise new equity capital by means of rights issues during the global financial crisis, demonstrating the existence of a first-move advantage: within a SEO wave, banks that acted first were able to complete the capital increase at more favorable conditions than their peers that acted later. We also show that first-movers experienced higher valuation ratios at the final cum-rights date compared to late-comers. As a result, first-movers obtained a double advantage: they could offer a lower discount on a price that embedded an higher valuation ratio.     

Bought deals: The value of underwriter certification in seasoned equity offerings

The bought deal is the predominant method of underwriting SEOs in Canada. Offer prices are set and underwriters commit to purchase offerings several days earlier for bought deals than for firm commitment issues, implying stronger underwriter certification for bought deal issues. Consistent with the certification hypothesis, this study finds a significantly smaller negative stock price reaction around the announcement of bought deals compared to firm commitment issues. Bought deals are further shown to have smaller offer price discounts and smaller underwriting fees, implying superior pricing and thus, higher quality offerings. These findings suggest that investment banks’ underwriting method of choice is informative of issue quality.