Why Do US Firms Choose Global Equity Offerings?

Abstract

This study examines the economic motivation for global seasoned equity offerings made by US firms. We find that firms announcing global offerings have significantly less negative market reactions than had they limited the issues to domestic only. The extent of the reduced price drop at issue announcement is found to be negatively associated with pre-announcement price run-up, firm size, and market-to-book equity, but positively associated with unsystematic risk. We also find that global issuingfirms outperform their domestic counterparts for up to three years following the offerings. As an increasing number of foreign companies have raised equity capital in the US capital market, many US companies are seeking global dissemination of their new equity through a procedure that commonly sets aside a proportion of the total shares for targeted foreign investors (global tranche) with simultaneous issue of the remaining shares in standard registered form in the US domestic market (domestic tranche). Although the two tranches are marketed separately by two syndicates of underwriters, the global tranche is usually led by the overseas affiliates of the lead US underwriters of the domestic tranche to ensure tight control over the allocation of shares. The offer price is the same to all investors, regardless of nationality, because the Rules of Fair Practice of the National Association of Securities Dealers (NASD) do not allow price discrimination. Since there is generally no obstacle to foreign investors purchasing shares directly in the US market, one might wonder about the motivations for and potential benefits of global issues. We develop three hypotheses regarding the motivations of global offerings. The name recognition and accessibility hypothesis suggests that global issues enhance investor recognition and participation in both the primary and the secondary markets. The alleviation of asymmetric information hypothesis posits that the ability to issue global shares may serve to validate firm quality, reducing the information asymmetry between insiders and investors. The window of opportunity hypothesis postulates that firms may switch to global offerings when domestic demand for their new shares is weak. We examine the economic effect of global issues by comparing a sample of global seasoned equity offerings made by US industrial companies from 1985 through 1995 and a domestic control sample that includes all purely domestic offerings during the same period.