Share Issuance Research Articles

International stock market liquidity: a review

Purpose – The purpose of this paper is to review the literature on liquidity in international stock markets, highlights differences and similarities in empirical results across existing studies, and identifies areas requiring further research. Design/methodology/approach – International cross-country studies on stock market liquidity are categorized and reviewed. Important relevant single-country studies are also discussed. Findings – Market liquidity is influenced by exchange characteristics (e.g. the presence of market makers) and regulations (e.g. short-sales constraints). The literature has identified the most appropriate liquidity measures for global research, and for emerging and frontier markets, respectively. Major empirical facts are as follows. Liquidity co-varies within and across countries. Both the liquidity level and liquidity uncertainty are priced internationally. Liquidity is positively associated with firm transparency and share issuance, and negatively related to dividends paid out. The impact of internationalization on liquidity is not universal across firms and countries. Some suggested areas for future studies include: dark pools, high-frequency trading, commonality in liquidity premium, funding liquidity, liquidity and capital structure, and liquidity and transparency. Research limitations/implications – The paper focusses on international stock markets and does not consider liquidity in international bond or foreign exchange markets. Originality/value – This paper provides a comprehensive survey of empirical studies on liquidity in international developed and emerging stock markets.

Private Placement and Rights Issue Cycles

The paucity of rights issues in the US and the effect of the imputation tax system on share issuance in Australia allow us to examine the drivers of seasoned equity offerings (SEOs) in a unique setting. This paper provides a comprehensive examination of the factors (information asymmetry, demand for capital, market timing and investor sentiment) that cause the number of seasoned equity offerings to vary over time. We find that in an imputation environment, cycles in total SEO issuance and private placements are driven by the demand for capital, whereas rights issue cycles are driven by investor sentiment. Our results suggest that as firms require capital for investment there will be an increase in SEOs driven by placements and that firms increasingly utilise rights issues when investor sentiment is high, thereby reducing the risk inherent in rights issues.

Share issuance and equity returns in Borsa Istanbul

This paper investigates the predictive power of share issuance on equity returns in BIST. The share issuance measure which is the annual logarithmic change in shares outstanding that is adjusted for distribution events is not significantly related to expected equity returns in a univariate setting. This is due to the prevalence of rights offerings in BIST and the consequent mechanical relation between the issuance measure and the book-to-market effect. After controlling for book-to-market, size and momentum factors, there is a significantly negative relation between share issuance and expected returns, especially for longer return horizons. The results from the portfolio analysis confirm this finding and show that the portion of share issuance that cannot be explained by the book-to-market effect has a strong negative cross-sectional relation with expected equity returns in BIST.

Making Money While You Sleep? Anomalies in International Day and Night Returns

In this paper, we decompose return premia into day and night components based on a sample of more than 48,000 stocks from 35 countries including the United States. Day returns are higher than night returns, but have similar volatility. Payoffs to value- or equally-weighted investment strategies based on size, book-to-market, momentum, long-term reversals, accruals, net share issuances, asset growth, and profitability tend to be positive for day returns, but negative or zero for night returns. Fama-MacBeth tests show that the well-known relationships between total returns and lagged firm characteristics are the result of their relationships with day returns, while their relationships with night returns are of opposite signs. While contemporaneous, independent work by Lou et al. (2015) also documents that U.S. price momentum occurs overnight, this result is the exception rather than the rule, since price momentum as well as most other anomalies are driven by day returns outside the United States. Results are robust across countries and subsamples, although there are variations in the magnitude of the strategy payoffs across countries.

Intra-Group Share Issuance – Out of the Realm of Transfer Pricing

The authors discuss the recent Vodafone and Shell cases and the significance of these two transfer pricing cases for India’s taxpayers, government and investment climate.

Net share issues and the cross‐section of equity returns under a dividend imputation tax system

AbstractDespite considerable empirical evidence reporting a negative relationship between net share issuance and subsequent returns, it remains unresolved whether this anomaly is explained by risk or investor irrationality. This study examines the net share issuance anomaly using seasoned equity offerings before and after the introduction of an imputation tax system. We report robust evidence of a negative relationship between net share issuance and returns post‐imputation, but no relationship pre‐imputation. Our results provide evidence to support the international pervasiveness of the net share issuance anomaly, but more importantly suggest that this anomaly may be explained by risk.

Net payout return: An alternative to the traditional returns approach based on dividends and share repurchases

We examine two alternative measures of equity returns incorporating stock repurchases as well as dividends, the other incorporating new equity issuance. We compute stock returns for 30 S&P 500 firms using all three approaches and find that stock repurchases have on average increased average annual returns by almost 2% and geometric returns by +1.6% per annum, whilst new share issuance reduces average returns by 1.1% a year. We also find similar results at the aggregate portfolio level. We argue that investors should be concerned about total shareholder flows and not the amount of cash distributed through any particular channel.

Do Short-Term Institutions and Short Sellers Exploit the Net Share Issuance Effect?

Existing literature documents that net share issuance significantly predicts cross-sectional stock returns, and yet institutional investors in aggregate do not trade on the net share issuance effect. Motivated by the findings in the existing literature that short-term institutions and short sellers are better informed and more sophisticated, in this study we examine whether short-term institutions and short sellers exploit the net share issuance effect. We provide evidence that short-term institutional investors and short sellers indeed trade in the direction of the net share issuance effect. Our results from Granger-Causality tests show that short sellers exploit information contained in net share issuance and the trading of institutional investors. In particular, short sellers take advantage of the trade of long-term institutions on the short side of the net share issuance effect.

Share Issuance and Equity Returns in BIST

This paper investigates the predictive power of share issuance on equity returns in BIST. The share issuance measure which is the annual logarithmic change in shares outstanding that is adjusted for distribution events is not significantly related to expected equity returns in a univariate setting. This is due to the prevalence of rights offerings in BIST and the consequent mechanical relation between the issuance measure and the book-to-market effect. After controlling for book-to-market, size and momentum factors, there is a significantly negative relation between share issuance and expected returns, especially for longer return horizons. The results from the portfolio analysis confirm this finding and show that the portion of share issuance that cannot be explained by the book-to-market effect has a strong negative cross-sectional relation with expected equity returns in BIST between 1992 and 2011.

Short-Term Trading and Stock Return Anomalies: Momentum, Reversal, and Share Issuance*

This article examines how the extent of short-term trading relates to the efficiency of stock prices. We employ a new duration measure based on quarterly institutional investors’ portfolio holdings, next to existing proxies such as trading volume, the percentage of transient institutions, and fund turnover. Momentum returns and subsequent returns reversal are generally much stronger for stocks held primarily by short-term investors, especially if these investors recently had superior recent performance which could make them overconfident. Our results point toward the behavioral theory in Daniel, Hirshleifer and Subrahmanyam (1998) and seem inconsistent with short-term institutions improving efficiency.

Should Exchanges Allow Larger and More Discounted Placements? An Analysis of Changes to ASX Listing Rules

This paper analyzes the desirability of relaxing constraints on non-pro-rata share issuances and examines amendments to Australian listing rules that have done so. The Australian Stock Exchange (ASX) recently amended its listing rules to allow small-cap companies to issue up to 25% of their share capital at a discount of up to 25% (up from 15% issue at a 15% discount), if the company satisfies certain requirements (including approval of a supermajority of shareholders). The new changes have the potential to distort the shareholder-register. Further, if the equity issue is made to an existing blockholder (or blockholders), the super-majority requirement for the issue to take-place may only require a minority of non-blockholder-shareholders to agree. However, existing directors’ duties and shareholder remedies should be sufficient to protect shareholders from abuse of the new rules. Thus, they could provide additional flexibility to firms who may require significant capital-injections in order to undertake major investments or raise capital to stave-off financial distress.

The Business Cycle, Investor Sentiment, and Costly External Finance

ABSTRACTThe recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time‐varies and, if so, what are the real effects. Consistent with time‐varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.

Can Credit Conditions Explain IPO Activities? Evidence from Share Issuance and Withdrawal

If banks reveal their private information it should influence investors’ willingness to supply equity capital. We examine this in the setting of IPO markets using a private-information proxy from credit standards. We find that an unfavorable private-information signal results in a decline (increase) in the number of IPOs (withdrawals), indicating a rational capital-supply-driven link between bank loan and IPO markets. This link is strongest where banks’ private information should be most valuable to outside investors and is robust to endogeneity and changes in capital demand. Our results suggest that the credit channel is important to a wellfunctioning IPO market.

Controlling shareholders and market timing in share issuance

We examine market timing in the equity issuance of firms controlled by large shareholders using a hand-collected data set of controlling shareholders' ownership stakes in Chile between 1990 and 2009. When a firm issues shares, the controlling shareholder can either maintain or change his ownership stake depending on how many of the new shares he subscribes. Issuance predicts poor future returns and is preceded by high returns, but only when the controlling shareholder's stake is significantly reduced. Consistent with market timing, the results are stronger in the absence of institutional investors and in hot issuance markets.

Ultimate Controlling Shareholders and Dividend Payout Policy in Chinese Stock Market

Departing from the traditional cash flow rights-dividend policy framework, this study investigates whether the level of control rights and the types of control of the ultimate controlling shareholders (UCSs) of listed firms in China influence their cash dividend policy. We find that the level of control rights is positively associated with both the propensity to pay and the level of cash dividend payout, which indicates that the ultimate controlling shareholders are likely to use cash dividends to redirect financial resources from the firms as other channels of tunnelling are blocked by Chinese security regulatory body. Furthermore, different types of ultimate controllers exert dissimilar influences on the controlled firms’ cash dividend policy. The difference might stem from the historical nature of these ultimate controlling shareholders originating from China’s unique partial share issuance privatization process.

Share Issuance and Cross-Sectional Returns: The Importance of Controllers’ Stakes

We examine market timing in the equity issuance of firms controlled by large shareholders using a hand-collected data set of controlling shareholders’ ownership stakes in Chile between 1990 and 2009. When a firm issues shares, the controlling shareholder can either maintain or change his ownership stake depending on how many of the new shares he subscribes. Issuance predicts poor future returns and is preceded by high returns, but only when the controlling shareholder’s stake is significantly reduced. Consistent with market timing, the results are stronger in the absence of institutional investors and in hot issuance markets.

Insufficiency of Serbian economy's operating performances: Manifestations, causes and main guidelines of recovery

Serbia faced the economic crisis with powerless and very fragile economy. The inconvenient transition heritage made the consequences of global economic crisis even worse. The companies that had already experienced serious problems approached to bankruptcy. Other, healthier companies, kept some kind of business activity, but they were faced with the lack of capital. Low activity level disabled generating higher incomes. In this way, the possibility of growth based on internal financing sources was limited. More difficult capital obtaining, by means of share issuance, led the companies, due to insufficiently developed capital market, to borrowing at very high costs. The consequences are very worrying. In the first part of this paper, we will try to quantify the consequences of Serbian economy's financial staggering. The aim is to visualize the complexity of financial and structural heritage and to show to what extent it is the burden to the growth of Serbian economy. At the same time, elaborations in this part should serve to identify some prerequisites for the creation of favourable business environment, stimulating to investors and able to provide the economy to operate in normal conditions. Finally, in the third part, we point to the basic guidelines in the process of overcoming financial and structural problems.

Flow-Induced Mispricing and Corporate Investment

The impact of liquidity-motivated institutional trading on firms’ real decisions is not confined to periods of financial crises. Firms subject to mutual fund flow-driven selling pressure reduce share issuance and investment, whereas firms experiencing buying pressure do not increase investment, although they issue more equity. Firms under extreme selling pressure cut quarterly investment by 0.075 percentage points of total assets, which is 4.3% of the average quarterly investment in our sample. We also find evidence that the effect is not attributed to managerial learning or catering incentives. Rather, flow-driven trading affects investment mainly through its impact on the financing cost.

Share Issuance and Factor Timing

Share Issuance and Factor Timing

Share Issuance Effects in the Cross-Section of Stock Returns

Previous research describes the net share issuance anomaly in U.S. stocks as pervasive, both in size-based sorts and in cross-section regressions. As a further test of its pervasiveness, this paper undertakes an in-depth study of share issuance effects in the Australian equity market. The anomaly is observed in all size stocks except micro stocks. For example, equal weighted portfolios of non-issuing big stocks outperform portfolios of high issuing big stocks by an average of 0.84% per month over 1990–2009. This outperformance survives risk adjustment and appears to subsume the asset growth effect in Australian stock returns.