UK retailers: What motivates the decision to raise finance?

Abstract

This article examines the relationship between company performance (measured using share price and earnings) and the decision to raise finance by UK retail companies. Two theories of what motivates new financings are examined, namely: (i) the balancing theory; and (ii) the pecking order theory. Analysis of the share price and earnings performance, in the 10 years surrounding the financing, finds that the retail companies exhibit abnormally positive share price and earnings performance in the post-financing period. Regression analysis of the possible determinants of this abnormal performance indicates that the principal motivating factor for the financings appears to be growth opportunities. Therefore we conclude that the results for UK retail companies are supportive of the pecking order theory, as adjusted for growth opportunities [Pilotte, 1992. Journal of Business 65(3), 371–394]. Further regression analysis to determine what factors influence the amount raised provides additional support for this conclusion. New financings by UK retail companies should therefore be perceived positively by the investment community.