The long-run share price performance of seasoned equity offerings (SEOs) : evidence from UK equity rights issues 1986-1995
The much-documented evidence of long-run underperformance following seasoned equity offerings is biased towards public offers and has been attributed mainly to overvaluation exploitation, due to information asymmetry between firm managers and prospective investors. This thesis investigates the long-run performance of seasoned equity offerings (SEOs) via rights issues. Because the new shares in a rights issue are offered pro rata to the existing shareholders, overvaluation exploitation is hardly a plausible explanation for their subsequent performance. Consequently, rather than testing the overvaluation exploitation, or other suggested hypotheses, the thesis focuses on a variety of issue and issuing firm characteristics, including ownership structures, as possible explanations of post-issue performance. The thesis uses 818 independent equity rights issues conducted on the London Stock Exchange during the period 1986-1995. The buy-and-hold abnormal returns (BHARs) model is employed. For each issuer, returns on a control (nonissuing) firm conservatively chosen by size, size and industry, and size and market-to-book ratios, are used to proxy for expected returns. Both parametric and nonparametric tests are used to assess the significance of the abnormal returns. The average BHARs are then segmented into categories according to issue characteristics, firm characteristics, and ownership structure, and compared across the sample segments. Consistent with the SEO underperformance literature, investments in the shares of firms making rights issues underperform all benchmarks, over all horizons considered. The underperformance is not significantly different across firm size, market-to-book ratio, issue size quintiles, or across different uses of issue proceeds. It is more severe for firms issuing during periods of high issue activities, for younger firms and for firms that had high prior issue frequency. The underperformance is prevalent in many industry sectors. However, it is stronger in the "engineering" sector but none is found in the "mining" and "electronic and electricals" sectors. Surprisingly, the underperformance disappears in the later years of the sample period. The ownership structures of issuers changed significantly following the rights issues but the impact of these changes on the BHARs depends on the pre-offering levels of ownership. The results suggests that the underperformance phenomenon is neither a market nor offer-method specific. Also within the BHARs framework, the choice of benchmarks makes no difference. Having controlled for size, industry, and market-to-book ratios, the underperformance can still be explained partly by some of the other issue and firm characteristics. Moreover, while the postoffering ownership structure has a weak explanatory power, its changes around the offering potentially explain part of the underperformance when pre-offering ownership levels are taken into account.