Abstract
We have carried out an event study to investigate stock returns associated with the announcement of equity issues by Brazilian firms between 1992 and 2003 in order to determine market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. Our results are remarkably consistent with most of the international empirical literature. Some previous empirical findings have turned up abnormal returns before the announcement date, interpreted as signs of insider information. This evidence also appears in our study as we found an average cumulative abnormal return of -0.01 three weeks before the announcement. With respect to the announcement date, the evidence reported in the literature is virtually unanimous in showing negative abnormal returns, meaning that stock issues convey pessimistic information to the market. Our study confirms these findings with an average -0.03 cumulative abnormal return on the first three days following the announcement. Finally, the empirical literature has also collected evidence of long-term negative abnormal returns after the issues, which we also confirm, with an abnormal return of -0.28 after one year following the announcement. The results also show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation.
Highlights
The empirical evidence on market reactions to equity issues has inspired researchers to develop theories to explain seemingly abnormal results, contributing to a better understanding of the phenomena of capital markets
Authors have proposed several hypotheses to explain market reactions to public equity offerings. These may fall into three categories: a) There is no price effect – in agreement with the hypotheses of an efficient market and considering shares as close substitute goods; b) There are negative price effects – in agreement with informational effects associated with the issuing of overpriced equities by well-informed sellers, to leveraged-related capital structure hypotheses based upon redistribution of firm value among different classes of stockholders, and to downward-sloping demand curves for shares; and c) There are positive price effects – consistent with favorable information signaled by investment, and with a reduction in expected costs of financial distress and agency costs
Considering that in half of the sample the residuals were accepted as Gaussian and the fact that the sample is sufficiently large (N = 80), the residuals’ normality violation in the other half of the sample is practically harmless, given the Central Limit Theorem
Summary
The empirical evidence on market reactions to equity issues has inspired researchers to develop theories to explain seemingly abnormal results, contributing to a better understanding of the phenomena of capital markets. Authors have proposed several hypotheses to explain market reactions to public equity offerings These may fall into three categories: a) There is no price effect – in agreement with the hypotheses of an efficient market and considering shares as close substitute goods; b) There are negative price effects – in agreement with informational effects associated with the issuing of overpriced equities by well-informed sellers, to leveraged-related capital structure hypotheses based upon redistribution of firm value among different classes of stockholders, and to downward-sloping demand curves for shares; and c) There are positive price effects – consistent with favorable information signaled by investment, and with a reduction in expected costs of financial distress and agency costs. We have replaced the original OLS estimation by ARCH or GARCH estimations, as necessary, with improved statistical results
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