Equity Issue Announcements Research Articles

Managerial confidence and capital structure announcement effects on share prices on the Johannesburg Share Exchange

Background: In an attempt to enhance our understanding of the important determinants of the debt–equity choice, there is a need to explore the behavioural facets driving the decision to issue either debt or equity. Furthermore, the divergent set of implications of equity and debt issues on the share prices are empirical matters that need to be addressed.Aim: In this article the link is investigated between managerial confidence and the likelihood of issuing debt, as well as the share price implications of equity and debt issue announcements on the Johannesburg Share Exchange (JSE).Setting: The study is based on the equity bond issue announcements of JSE-listed firms for the period 2000–2020.Method: In this article, panel data regression and event study approaches are used in a sample of 81 and 113 bond and equity issue announcements, respectively, for 69 firms listed on the JSE.Results: The main findings of this article indicate that managerial optimism drives debt issuing activities on the JSE and that there are negative and significant abnormal returns associated with the announcement of equity issues.Conclusion: Overall, we conclude that behavioural finance is an important factor driving capital structure decisions, and that signalling, as well as market-timing concerns drive share price reactions on the JSE.Contribution: This article highlights the importance of behavioural factors in capital structure decisions and identifies the firm-specific channels through which managerial optimism drives leverage. Additionally, the article sheds light on the role of signalling and market timing in capital structure decisions.

Information content of insider filings after stock repurchase and seasoned equity issue announcements

AbstractThis paper examines the information content of insider filings after stock repurchase and seasoned equity issue (SEOs) announcements. We find that when firms and insiders trade in the same directions, the absolute value of the market reaction to insiders' purchase filings after stock repurchase announcements is larger than that to insiders' sale filings after SEO announcements. Thus, although insiders' sale filings after SEO announcements still suggest that the stocks are overvalued, the signals may be less informative owing to the confounding effect of some insiders' liquidity needs. When the firms and insiders trade in opposite directions, insiders' purchases after a firm's sale dominate insiders' sales after a firm's purchase, since insiders' purchase always convey positive information about a firm's future. When the firms and insiders trade in the same direction, the abnormal returns following purchases (or sales) depend on the type of insiders who make the trade. The positive (negative) abnormal returns following purchases (sales) decrease in absolute value according to the category of insiders, which is consistent with the information hierarchy hypothesis. When firms and insiders trade in opposite directions, the results are similar, but the magnitude is weak. Based on our results, the insiders who are more familiar with the day‐to‐day operations of the firm would trade on more valuable information than other insiders. Although following CEO trades more closely results in CEOs trading more cautiously, CEOs face less litigation risk and trade more on their informational advantages after event announcements.

The Announcement Effect of Junk Bond Issues: an Analysis of the 1976-1989 Period

This paper analyzes the impact of corporate junk bond offering announcements on stock prices for a sample of 680 issues of below investment grade bonds, during the 1976-1989 period. The sample shows a -1.0% cumulative abnormal return (CAR) for a two day event window period, and the zero CAR hypothesis is rejected with 99% confidence. The cumulative abnormal returns are negative and significant for combined announcements of bond and equity issues (CAR of -2.10%), and for announcements of convertible bond issues (CAR of -1.24%). Announcements of issues of straight bonds (CAR of -0.24%) are not significantly different from zero. Differences in CARs are observed across subsamples formed on the basis of size of the issuer, relative size of the issue, rating of the issue, name of the underwriter, market value of the issuer, and year of issue, but these variables are not significant when used in cross sectional regressions. The only variables with some explanatory power in those regressions are the ones indicating type of the issue, recession periods, and the dummy used to identify announcements made in 1976 (the first year junk bond issues were allowed).

Financial constraints and dividend policy

Using a sample of US listed firms over the 1989–2012 period, we find that financially constrained dividend-increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver inferior post-dividend-increase long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase, but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

Stock Price Reaction to Announcements of Right Issues and Debenture Issues: Evidence from Colombo Stock Exchange

This study investigates the stock market reaction for right issues and debenture issues of Colombo Stock Exchange (CSE) during the period of 2005 to 2011 while providing evidence for the research question “how do stock prices react to the debt and equity issue announcements of listed companies in CSE?” In investigating the ex-ante and ex-post market reactions the study employees event study methodology, while predicting abnormal returns, based on three alternative normal/expected returns modeling methods, namely Mean Adjusted Model, Market Adjusted Model, and Capital Asset Pricing Model. When testing the alternative hypothesis, whether stock prices significantly reacts to the announcement of right & debenture issues, results of all models show positive market reaction during the 30 days prior to the announcement and react negatively from 2 days after the announcements for right issues, but for debenture issues market reacted negatively during the period prior to debenture issues and continue to do the same during the post event period. Although the magnitude and significance of abnormal return generated through three alternatives methods differ, the pattern of the CAAR of all models are similar. Thus, as far as the speed of the price adjustment is concerned it seems that the CSE is not efficient.

CDS and Equity Market Reactions to Stock Issuances in the U.S. Financial Industry: Evidence from the 2002-13 Period

We study market reactions to seasoned equity issuances that were announced by financial companies between 2002 and 2013. To assess the risk and valuation implications of these seasoned equity issuances, we conduct an event analysis using daily credit default swap (CDS) and stock market pricing data. The major findings of the paper are that CDS prices respond quickly to new, default-relevant information. Over the full sample period, cumulative abnormal CDS spreads drop in response to equity issuance announcements. The reactions are significantly stronger during the financial crisis. At that time, the federal government injected equity into financial institutions to ensure their viability. The market reacted to the equity issue announcements by assessing significantly lower costs for default protection via credit default swaps. The evidence indicates that single-name CDS based on financial firms’ default probabilities are potentially useful for private investors and regulators.

Financial Constraints and Dividend Policy

Using a sample of US listed firms over the 1989-2012 period, we find that financially constrained dividend increasing firms experience superior short-run abnormal stock returns, but suffer worse operating performance compared to similar unconstrained firms. More specifically, constrained firms in more competitive industries realize poorer long-run and operating performance. Likewise, constrained firms that increase dividends during the financial crisis also deliver post-dividend-increase inferior long-run return than do unconstrained firms. We also find evidence that constrained firms show worse stock market reaction to new equity issue announcements following dividend increase but display a positive market response if they potentially have high investment growth opportunities. Our results are robust to alternative financial constraint proxies and abnormal return measures.

Franking credits and market reactions: Evidence from the Australian convertible security market

This study investigates whether convertible preference share issues affect firm value in Australia. The literature suggests that the announcement of straight equity issues has a negative impact. However, the outcome for convertible preference share issues (CPS) remains unknown. We selected those CPS deemed to be equity-like under the 2001 tax classification framework for this study, as only such convertibles may attach franking credits to their dividends. In line with the straight equity studies, we found significant and abnormal negative returns during the announcement periods. We initially report no statistical significance between the issuing firm's available franking credit levels and market reaction. When we controlled for ownership concentration, however, we found a positive and statistical association. This is the first study to report such an association within the CPS market, suggesting that equity-like CPS resident investors may seek franking credits and so react positively to an issuing firm's level of available franking credits.

A Servant to Many Masters: Competing Shareholder Preferences and Limits to Catering

AbstractWe study what determines catering through the payout policy and how catering affects firm value. We create a catering index, measuring how the firm caters to its investors’ payout preferences. The index is based on the revealed payout preferences of mutual funds holding the firm’s stocks. Catering is constrained by market segmentation and dispersion in investor payout preferences. It is also associated with positive value effects: Firms increasing their catering index also experience an increase in value. Furthermore, greater catering ability is associated with a more positive market reaction to corporate announcements of equity issues and dividend payouts.

Durations between Equity and Debt Issues and Their Effect on the Offering Announcement Returns

This study examines (1) durations between equity and debt offerings over the corporate lifecycle, (2) the factors that explain variations in the time to equity or debt issue, and (3) the relation between the market reaction to equity and debt issue announcements and the duration between offerings. We report that after the Initial Public Offering (IPO), the first seasoned equity issue is quicker than the first seasoned debt issue. However, for subsequent seasoned offerings, debt issues are quicker than equity. Using duration analysis, we show that shorter durations between equity and debt issues are explained by stock mispricing, VC-backing of the stock at the IPO, measures of information asymmetry, stock liquidity, deviations from target leverage, return volatility, financing gap, firm investments and the choice of public vs. private placement. Also, the time to an equity issue is shorter if the previous issue was of debt. Investors react more unfavorably to equity and debt issues that follow closely from the previous offering. This is because firms with higher information asymmetry and stock mispricing are more likely to quickly issue equity and debt following the previous capital acquisition. Together, our study shows that duration between equity and debt issues signals issuer quality and that investors discount this information in the stock price at the equity and debt issue announcements. JEL classification: G30, G32, C41

Brazilian Market Reaction to Equity Issue Announcements

Brazilian Market Reaction to Equity Issue Announcements

The Effects of Pre‐issue Information Releases on Seasoned Equity Offerings

Abstract: Because of information asymmetry, managers tend to make pre‐issue disclosures to reduce the costs of seasoned equity offerings. This paper discusses whether pre‐issue information releases of major investments, financial forecast revisions and dividends help the investors to anticipate seasoned equity offerings and assist in reducing the information asymmetry when the managers announce equity issues. We analyze price and trading volume reactions to equity issue announcements to infer the degree of information asymmetry. Consistent with our expectations, we find that these three types of pre‐issue disclosures can help investors to anticipate equity issues. However, after controlling for anticipation and cross‐sectional variation in uncertainty, we find none of the disclosures are capable of reducing the price drop at issue announcement, and only the disclosures of increased cash dividends have the effect of reducing the negative trading volume reactions. In addition, both the price and trading volume reactions are not related to the intervals between the disclosures and the issue announcements.

Private placements of common equity and the industry rival response

This study examines the intra-industry signalling effects of private equity issue announcements. The results show that the average industry reaction to a private equity announcement is negative. However, evidence of a contagion effect also exists. Specifically, the competitive response among industry rivals is significantly stronger for private equity issues during bear stock markets. In fact, the industry rival reaction for nonhigh-tech firms is significantly negative during bear markets only, while it is significantly positive during bull markets. These findings highlight the importance of stock market conditions in influencing the signals sent by private equity issues and the resulting shareholder wealth effects.

Brazilian market reaction to equity issue announcements

We have carried out an event study to investigate stock returns associated with the announcement of equity issues by Brazilian firms between 1992 and 2003 in order to determine market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. Our results are remarkably consistent with most of the international empirical literature. Some previous empirical findings have turned up abnormal returns before the announcement date, interpreted as signs of insider information. This evidence also appears in our study as we found an average cumulative abnormal return of -0.01 three weeks before the announcement. With respect to the announcement date, the evidence reported in the literature is virtually unanimous in showing negative abnormal returns, meaning that stock issues convey pessimistic information to the market. Our study confirms these findings with an average -0.03 cumulative abnormal return on the first three days following the announcement. Finally, the empirical literature has also collected evidence of long-term negative abnormal returns after the issues, which we also confirm, with an abnormal return of -0.28 after one year following the announcement. The results also show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation.

Brazilian market reaction to equity issue announcements

We have carried out an event study to investigate stock returns associated with the announcement of equity issues by Brazilian firms between 1992 and 2003 in order to determine market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. Our results are remarkably consistent with most of the international empirical literature. Some previous empirical findings have turned up abnormal returns before the announcement date, interpreted as signs of insider information. This evidence also appears in our study as we found an average cumulative abnormal return of -0.01 three weeks before the announcement. With respect to the announcement date, the evidence reported in the literature is virtually unanimous in showing negative abnormal returns, meaning that stock issues convey pessimistic information to the market. Our study confirms these findings with an average -0.03 cumulative abnormal return on the first three days following the announcement. Finally, the empirical literature has also collected evidence of long-term negative abnormal returns after the issues, which we also confirm, with an abnormal return of -0.28 after one year following the announcement. The results also show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation.

Market Reaction and Volatility in the Brazilian Stock Market

We perform an event study to investigate stock returns associated to the announcement of equity issues by Brazilian firms between 1992 and 2003 aiming to determine the market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. The results show signs of insider information, negative abnormal returns around the announcement, and persistent negative abnormal returns in the long-term after the issue. The results are consistent with the extant empirical literature and show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation.

Conditional event studies, anticipation, and asymmetric information: the case of seasoned equity issues and pre-issue information releases

Information disclosed before equity issue announcements could reduce the price drops at the announcements by (1) reducing uncertainty about managers' private information, and/or (2) helping investors to anticipate the equity issues. To distinguish between these effects, we examine the determinants of firms' decisions to issue equity, and develop a conditional event-study procedure, based on Acharya [Acharya, S., 1988, A generalized econometric model and tests of a signaling hypothesis with two discrete signals, Journal of Finance, 43, 413–429.], that distinguishes between anticipation and asymmetric information. After controlling for differences in uncertainty across firms, we present evidence that stock split declarations, dividend announcements and earnings releases help investors to anticipate equity issues, but do not reduce asymmetric information.

The Information Effects of Analyst Activity at the Announcement of New Equity Issues

Myers and Majluf (1984) argue that informational asymmetry between managers and investors can explain the negative stock returns around the announcement of new equity. Using analyst following and consensus as proxies for information asymmetry, we observe that announcement period returns are significantly more negative for firms followed by fewer analysts and whose forecasts exhibit less consensus. Our findings hold after controlling for firm size and growth opportunities. Finally, we find evidence suggesting that analyst activity also influences firms’ long-term performance. We conclude that the information role of security analysts partially explains the negative stock returns surrounding the announcement of new equity.

An Assessment of the Market Reaction of UK Firms to a Private Placement Announcement

While considerable attention has been paid to market reaction announcements of public equity issues, only a small amount of research has been devoted to their private placement counterparts. This is surprising given that proceeds from the latter are typically used to finance firms’ new investment projects. This paper helps to redress the balance, by applying market model methodology to 78 private equity issue announcements in the UK over the period 1990-1995. Private placement announcements appear to be associated with positive abnormal returns. It is hypothesised that these arise from the unique negotiating structure between management and private clients.

The Underreaction Hypothesis and the New Issue Puzzle: Evidence from Japan

This paper investigates the long-term performance of Japanese firms issuing convertible debt and equity. We examine a wide range of types of issues: private issues, public issues, offshore issues, and rights issues. We find the issuing firms perform poorly (except for equity rights issues) even though the stock-price reaction to convertible debt and equity issue announcements is not significantly negative for Japanese firms. This underperformance is strongest for firms issuing public convertible debt in Japan. Though in the U.S. underperformance appears to be concentrated in the smaller firms and in the firms with a high market-to-book ratio, this is not the case in Japan. Simple behavioral explanations for the underperformance of U.S. equity issuing firms do not seem consistent with the Japanese experience, but both countries fit a story where investors and managers are too optimistic about the investment opportunities of some firms.