Three Essays on Seasoned Equity Offerings: Evidence from Hong Kong Stock Market

Abstract

Investors react adversely to the announcements of rights offerings, and the abnormal returns of rights issues and open offers around the announcement day are -15.85% and -8.25%, respectively. The cross-sectional analysis shows that investors react more adversely to the announcements of rights issues by younger issuing firms with lower growth prospects, higher amount of free cash flow, larger issue scales, pre-issuance stock performance and higher debt capacity. These results support that information asymmetries and agency conflicts matter in explaining the announcement effect of seasoned equity offerings (SEOs). The largest shareholders of issuing firms are eligible to be the underwriters for rights issues and open offers. To reduce the adverse effect which is due to the problems of asymmetric information and agency conflicts, the largest shareholders are found to provide better underwriter certification than investment banks. While conventional corporate governance mechanisms are not effective enough to mitigate conflict problems in Hong Kong family-controlled firms which usually have large divergence between ownership and control, the better underwriter certification of the largest shareholders in SEO underwriting services is an example that an alternative mechanism is developed in mitigating information gap and conflict problems. Investment banks which have prior SEO underwriting relationship with issuing firms are also found to certify firm value better investment banks without such relationship. These two main findings of this study suggest that underwriters who possess more information and have information advantage about issuing firms are better certifiers. The finding of this study further shows that higher expected take-up from current shareholders results in less negative announcement returns but greater expected wealth transfers lead to more negative announcement returns. Large wealth transfers from nonparticipating current shareholders to participating current shareholders associated with open offers might cause the conflict between these two groups of shareholders. Therefore, the positive effect of the expected shareholder take-up on announcement returns is weaker when there is a large expected wealth transfer from nonparticipating to participating shareholders.