The short-run performance of equity issues in South Africa: Bad timing or a last resort?

Yudhvir Seetharam,Jesse A Da Cunha

doi:10.4102/jef.v11i1.179

Abstract

Understanding the stock market’s reaction to secondary equity offerings (SEOs) is vital for managers who are commonly tasked with deciding on how to finance their firm’s operations. This study investigated the short-run performance of firms conducting equity issuance on the Johannesburg Stock Exchange (JSE) over the period 1998–2015 by exploring both rational and behavioural models in predicting SEO behaviour. Event-study analysis reveals that the market generally reacts negatively to the announcement of SEOs with a statistically significant average two-day cumulative abnormal return of -2.6%. We also found that the probability of a firm conducting a SEO is significantly negatively related to the number of years listed and the future share return. Although it would make sense that more corporate activity takes place during periods of high investor sentiment, there is no significant evidence that firms conducting SEOs are attempting to time the market.

Highlights

Literature has documented that the stock market’s reaction to a firm’s announcement of a secondary equity offering (SEO) is generally negative (Ritter 2003; Smith 1986)
The second section explores the influence of investor sentiment, and other explanatory variables, on the probability of a firm conducting a SEO
An interesting, expected pattern emerges with investor sentiment peaking prior to the 2008 global financial crisis, followed by a sharp descent illustrating the spillover effect of the US housing crisis

Summary

Introduction

Literature has documented that the stock market’s reaction to a firm’s announcement of a secondary equity offering (SEO) is generally negative (Ritter 2003; Smith 1986). The adverse selection model, which is widely regarded amongst the existing literature as the conventional explanation for these negative announcement effects, proposes that investors view the decision of a firm to issue shares as ‘bad news’ about the true value of that firm This is because of the incentives that managers have to issue shares when they are overvalued in order to benefit existing shareholders, at the expense of new shareholders. If managers are attempting to time the market in order to issue overvalued shares, investor sentiment should play a significant role in a firm’s decision to issue equity. The first part of this study tests the announcement effects associated with SEOs, whereas the secondary focus is to analyse the influence of investor sentiment on the decision to conduct SEOs and the market’s reaction to the SEO These objectives refer to the behavioural explanations of SEO performance with a particular focus on the market timing theory.

Literature review

Results

Summary of the results

Conclusion