Changes in systematic risk following global equity issuance

Abstract

This paper examines changes in systematic risk following global equity issues by US firms. Models of market segmentation show that if international capital markets are not fully integrated and demand curves for securities are downward sloping, firms issue equity at higher prices by issuing in multiple markets compared to issuance on a single domestic market. This would imply a reduction in the firm’s cost of capital and an increase in firm value. Using a sample of global equity offers during 1986–1993, we find that US firms that issue equity abroad experience a decline in systematic risk subsequent to issuance. After controlling for size, volume, and leverage effects, we find that this decline in systematic risk is larger in magnitude for global compared to a control sample of domestic equity issues. The larger the proportion of the offer sold abroad and the larger the increase in trading volume, the bigger the decline in systematic risk. Using a two-factor global risk model we find that while firms issuing equity abroad experience a decline in the domestic component of systematic risk, the foreign component increases. Overall, however, the net effect is a decline in the cost of capital.