Timing of initial public offerings, seasoned equity offerings and takeover bids financed with equity : UK evidence
This thesis examines the "timing" of equity issues. We seek to find the factors that "drive" the time series variation in the equity issuance activity. Our main motivation is to see whether the Initial Public Offerings, Seasoned equity offerings and Takeover activity financed with equity move together. Our second motivation is to see whether certain individual factors affect the timing of the three corporate activities. We focus our research effort on whether business conditions, adverse selection costs and "sentiment timing" can explain the variation in equity issue activity across time. Economic conditions have a significant effect on equity issuance activity. More firms make an IPO and more capital is raised from IPOs during the upturn of the business cycle relative to the downturn of the cycle. The impact of economic conditions on the SEO volume is also positive but marginally significant. In addition, more bidders use equity to finance a takeover bid during the upturn of the business cycle. The improvement of business conditions has a significant effect on the magnitude of adverse selection costs associated with the announcement of a SEO and a takeover bid that is financed with equity. During the upturn of the business cycle the market reacts less adversely to the announcement of these actions while in the downturn of the cycle the announcement of the SEO and the equity financed bid is accompanied by more negative returns. Underpricing for IPOs however is not lower during the upturn of the business cycle. Firms that make an IPO, a SEO and a takeover bid that is financed with equity are associated with significant adverse share price movements which impose significant indirect costs to the issuers and bidders. This thesis investigates how these costs affect the timing of the three corporate actions. The magnitude of adverse selection costs has a significant effect only on the volume of Seasoned equity offerings with more firms making a rights issue during periods when the announcement of the recent rights issues is accompanied by less negative returns. IPO volume is not higher when the average first day returns of the recent IPOs are low and the percentage of bidders that use equity to finance the bid over all bidders is not higher when the drop of the share price of the bidder on the announcement of the recent equity financed bids is smaller. It has been widely documented that firms which make an IPO, a SEO and a takeover bid that is financed with equity offer inferior returns to their shareholders in the post-issue period. Cognitive bias and deliberate timing of these actions at periods when share prices are irrationally high are the best explanations that the literature has provided for the underperformance. We find a significant underperformance of SEOs and bidders that use equity to finance the bid and IPOs if the high first day returns are not included. These findings suggest that the above firms are overvalued at the time these action take place but does not address whether variations in volume across time are driven by variation in the degree of overvaluation. We find that only variations in IPO volume are driven by variations in the degree of overvaluation. Periods when more capital is raised from IPOs are periods when the average IPO is more overvalued than IPOs that go public in periods when IPO activity slows down. Variations in the SEO volume and the equity financed takeover activity are not driven by overvaluation exploitation. Time series regressions on the amount raised from IPOs and SEOs reveals the significant role of investors' sentiment on the timing of equity issues. We use financial analysts earnings forecasts as a proxy for market sentiment and we find that more capital is raised from IPOs during periods when analysts' earnings forecasts for the recent IPOs are more optimistic. We also find that more capital is raised from SEOs during periods when analysts' earnings forecasts for the recent SEOs are more overoptimistic. Previous empirical studies suggest that firms time the issues at the peak of their profitability. Our evidence from financial analysts earnings forecast revisions reveal that SEO firms time the issue after a period of high earnings growth and prior to a small deterioration in earnings while IPO firms time the issue at the beginning or during a period of sustainable earnings growth and not at the peak of their profitability.