Secondary Equity Research Articles

Recapitalization of One Class of Common Stock into Dual-Class: Growth and Long-Run Stock Returns

We study a sample of 178 firms that changed from a one-share one-vote into a dual-class common stock structure during 1979-1998. We find that dual-class recapitalizations are shareholder value enhancing corporate initiatives. Using accounting data, Lehn, Netter and Poulsen (1990) provide evidence that dual-class recapitalizing firms grow faster than firms in a control group and undertake secondary equity offerings (SEOs) to finance growth. We show that growth is indeed beneficial to the shareholders. The stockholders, on average, earn significant positive abnormal returns of 23.11% in a period of four years following the announcement month. Furthermore, abnormal returns are even larger (52.61%) for the dual-class firms that issue equity. This evidence is especially supportive of the value enhancing hypothesis as it is contrary to the prevailing result that SEOs are generally followed by large negative returns. We do not find any evidence of managerial entrenchment.

A Second Look at the Secondary Private Equity Market”

A Second Look at the Secondary Private Equity Market”

The Long-Run Performance of Secondary Equity Issues: A Test of the Windows of Opportunity Hypothesis

We examine long-run stock and operating performance following secondary equity offerings. For a subsample of secondary issuers in which the seller is an insider, both three- and five-year post-issue abnormal stock returns are significantly negative. The findings are robust to alternative long-run abnormal return measurement methodologies. The abnormal returns are large relative to the initial market reaction (mean and median five-year abnormal returns of -33.33% and -73.80%, respectively). The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can be attributed to managers exploiting windows of opportunity by issuing overvalued shares.

A Second Look at the Secondary Private Equity Market

Until recently, secondary private equity was a relatively small niche of the private equity market, and little research on the area had been conducted. During the last 10 years, specialists who buy partnership interests in existing private equity funds have benefited from an inefficient market, and they have produced very impressive results. The current market opportunity for these specialists is largely due to recent record-breaking fundraising and a market downturn that increases the ranks of motivated sellers. However, secondary private equity specialists face a number of challenges, including a bevy of low-quality secondary opportunities, the possibility of informed sellers, and competition from primary fund-of-funds “dabbling” in their marketplace.

Modeling the interdependence of volatility and inter-transaction duration processes

This paper develops an approach for modeling the interdependence of intra-day volatility and trade duration processes, and extends the recursive specifications that have recently been proposed in the literature. We propose a suitable GMM estimation strategy that includes straightforward estimation of the autoregressive conditional duration model. A Monte Carlo study examines the performance of the estimation method. The empirical work investigates the impact of volatility on transaction intensity in the secondary equity market after a large initial public offering. We find that lagged volatility significantly reduces transaction intensity, which is consistent with predictions from microstructure theory.

Unit Initial Public Offerings: Staged Equity or Signaling Mechanism

We investigate the use of unit (i.e., package) initial public offerings by Australian industrial firms and conclude that their use reflects their role as a signaling mechanism (Chemmanur and Fulghieri, 1997), as distinct from the agency-cost explanation offered by Schultz (1993). From a sample of 394 IPOs between 1976 and 1994, the 66 firms making unit offerings are typically riskier, use less prestigious underwriters and have a lower level of retained ownership than other IPO firms. While these results are also consistent with Schultz's agency cost explanation, other results we report are not. We find no difference in underpricing between unit IPOs and other IPO firms, nor are there any significant differences in the planned uses of proceeds reported in the prospectus, post-listing failure rates or secondary equity offerings of the type predicted by Schultz. We do however, report evidence consistent with a prediction unique to the signaling explanation. After controlling for the level of ownership retained by insiders, the proportion of firm value sold as warrants is increasing in IPO firms' riskiness.

Discussion of “Voluntary Disclosure, Information Asymmetry, and Insider Selling through Secondary Equity Offerings”*

Discussion of “Voluntary Disclosure, Information Asymmetry, and Insider Selling through Secondary Equity Offerings”*

Voluntary Disclosure, Information Asymmetry, and Insider Selling through Secondary Equity Offerings*

AbstractThis paper examines the relation of voluntary disclosure of management earnings forecasts and information asymmetry to insider selling through secondary equity offerings. We hypothesize that the pattern of voluntary disclosure and level of information asymmetry prior to secondary equity offerings differs systematically based on the identity of the seller. Specifically, we predict a greater frequency of voluntary disclosure and decreased level of information asymmetry when managers sell their stock through a secondary offering. We examine this hypothesis in a cross‐sectional analysis of 210 secondary equity offerings from 1984‐91, using a two‐stage conditional maximum likelihood simultaneous equations estimation procedure, which allows for possible endogeneity in the manager's decision to sell stock. Consistent with our predictions, we document a significantly positive association between managerial participation and voluntary disclosure of earnings forecasts in the nine‐month period prior to registration of the offering. We also document a significantly negative association between managerial participation and two proxies for information asymmetry. The findings provide evidence that managers act as if reduced information asymmetry correlates with a reduced cost of capital.

The characteristics of new equity markets for SMEs

Against the background of a continuing SME equity gap, this paper describes the regulatory framework and characteristics of three new secondary equity markets (AIM, OFEX and EASDAQ) which have recently been launched in an attempt to facilitate the raising of external equity finance by SMEs. The paper provides some new evidence of the costs of joining each market compared to those of joining the Official List (the “first market”). New evidence is also provided of the characteristics and performance attributes of AIM firms, together with the cost of raising finance on AIM relative to the Official List. In addition, the characteristics of each market are examined with reference to market capitalisation, liquidity and share trading. The paper concludes with a discussion of the potential of the expanding number of new European secondary equity markets to bridge the SME equity gap, together with suggested areas for future research.

Debt Management by Companies Entering the Unlisted Securities Market

Abstract Using data drawn from the quotation of firms on UK secondary equity markets between November 1980 and March 1985, the paper examines the debt position and debt behaviour of such crucial firms at this critical point in their existence. It is concluded that newly-quoted firms are financially imbalanced at their quotation, but that this is only weakly related to their size, industry, growth, riskiness and yields. Clear evidence exists that entrants move towards target debt ratios, but these targets are again only poorly related to characteristics of firms suggested by the finance literature to be of importance in capital structure decisions.

Methods Used in Computing Secondary Equities, Wilmington Field, Los Angeles County, California

Many problems were encountered during the construction of net oil sand isopach maps from electric logs in Wilmington field, California. These maps were to be used for secondary equity determinations, and required committee agreement on all details. Problems arose in measuring sand thicknesses from electric logs, delineating exact fault-sand intercepts, and determining oil-water contacts. These problems were resolved with both old and new techniques through committee work. Sand thicknesses were measured from electric logs by a modified spontaneous potential-short normal counting method. Log measurements were compared with all available core data to establish uniform counting techniques. Net oil sand log measurements from directionally drilled wells were corrected to vertical equivalent thicknesses before being placed on the isopach maps. The omitted intervals caused by faulting were shown on the isopach maps by using zonal midpoint fault traces where the faults were within a major block, and by actually isopaching the fault wedge on block boundary faults. The net oil sand was also isopached in the edgewater areas. Sands that were being encroached by edge water were assigned area cut figures representing the estimated per cent of water that a well completed in that interval would produce. From these figures the per cent of originally oil-saturated sand no longer capable of producing oil was calculated. Average zonal oil gravities were assigned. These gravities were then converted to a value based on an historical average price range. Final secondary equities were calculated from the net oil sand isopach volumes penalized for water encroachment, oil gravity, production costs, and zonal differences.