Private Placement and Rights Issue Cycles

Abstract

The paucity of rights issues in the US and the effect of the imputation tax system on share issuance in Australia allow us to examine the drivers of seasoned equity offerings (SEOs) in a unique setting. This paper provides a comprehensive examination of the factors (information asymmetry, demand for capital, market timing and investor sentiment) that cause the number of seasoned equity offerings to vary over time. We find that in an imputation environment, cycles in total SEO issuance and private placements are driven by the demand for capital, whereas rights issue cycles are driven by investor sentiment. Our results suggest that as firms require capital for investment there will be an increase in SEOs driven by placements and that firms increasingly utilise rights issues when investor sentiment is high, thereby reducing the risk inherent in rights issues.