Wealth effects from equity sales in Japan: Role of bank monitoring and lender/owner conflict resolution

Abstract

Can corporations increase stockholders’ wealth by issuing equity securities? The empirical evidence from U.S. studies indicates that additional offerings of equity shares by industials, utilities, and banks are greeted with significant negative wealth effects at announcement.’ Similarly, when U.S. industrial firms sell convertible bonds, there is a significant decline in wealth at announcement.2 These empirical results are consistent with signalling, financial slack, and pecking order hypotheses. Can theoretical suggestions and results from empirical examinations of financing by U.S. firms be used to estimate the wealth impacts from ~anc~g by Japanese firms? Are finance theories, developed in the U.S. concerning the wealth impacts of capital sales, applicable to other advanced economies such as Japan? To answer these questions, this paper first measures the announcement effects of new equity sales and new convertible bond sales in the large and internationally well-known Japanese electronics industry from April 1,1984, through March 31, 1991. This study finds that the wealth effects of these equity sales are not negative. These results are quite different from those of financing by American firms and could not be inferred from the application of the extensive theory and empirical evidence from U.S. equity sales. However, Japanese firms operate in a business and contracting environment that has at least two uniquely different structural features that may have had an impact on the wealth effect of new equity sale ~ouncemel~ts. First, Japanese firms have much higher levels of bank loans as a percent of total debt than do American firms. 3 Thus, Japanese firms are subject to