Seth Armitage

Seasoned equity offers and rights issues: a review of the evidence

The paper reviews evidence from the USA and UK on seasoned equity offers (SEOs) and rights issues. There are two main avenues of research: first, the market reaction to announcements of SEOs, and the related questions of the price elasticity of demand for new shares and the timing of issues; second, the costs of issuing and choice of issuing method. The negative reaction to announcements is well documented and the evidence suggests it is more due to an issue being a signal of overvaluation than to inelastic demand. Other findings are less well understood. The shares of issuers underperform appreciably in the long term, and there is evidence that market receptiveness to new issues varies. Companies tend to choose the most expensive method of issue both in terms of direct costs and negative market reaction. US companies use underwritten non-rights, through underwriting increases the direct costs. A possible explanation is that certification of issue value by the sponsor is more credible with non-rights issues in the USA and underwritten rights in the UK than with the apparently cheaper alternatives.

Do Underwriters Certify Value? Evidence from UK Rights Issues and Open Offers

Eckbo and Masulis (1992) and Slovin, Sushka and Lai (2000) have proposed that underwriters of seasoned equity offers certify issuer value. The study tests predictions resulting from these papers and finds little evidence from UK rights issues and open offers that underwriting banks certify. The main purpose of underwriting appears to be simply to guarantee the proceeds. There is a positive reaction to open offers (a type of private placing) but this is unlikely to be due to underwriter certification. There is a large loss of value for companies announcing deeply discounted offers, which is attributed to release of bad news on announcement Copyright Blackwell Publishers Ltd 2002.

The Direct Costs of UK Rights Issues and Open Offers

The paper describes selling and underwriting procedures in rights issues and open offers, and analyses the costs of issue reported in prospectuses, including the substantial costs which are not for underwriting. The impression is often given that costs are fixed at 2% of gross proceeds, but they vary and average 5.78% (median 4.28%). Controlling for economies of scale and fees not related to the issue, costs increase with the proportion of the issue underwritten and with the depth of discount, and decrease with the proportion of the company owned by large shareholders.

Block buying and choice of issue method in UK seasoned equity offers

Much of the new equity declined by existing shareholders in UK SEOs is bought in a few large blocks, both by other existing holders and by new investors. The paper argues that a placing process via negotiation with investors facilitates the purchase of large blocks better than the alternative method of selling rights on the market, and that this helps to explain the decline of rights issues in the UK. Other explanations for use of the placing method appear to be of limited relevance, except perhaps certificaton of issuer value. Copyright (c) 2010 Blackwell Publishing Ltd.

Discounts in Placing Pre-Renounced Shares in Rights Issues

The paper presents evidence from UK rights issues on the discounts at which large blocks of new shares plus rights are sold. The shares are renounced by the shareholders entitled to them and placed with passive investors at substantial discounts of around 8% to the expected ex-rights midpoint price of the existing shares. Tests indicate that the discounts arise because of uncertainty about issuer value and inelastic demand for the shares rather than because the issuing companies are overvalued. The finding that selling renounced shares is costly removes an apparent advantage of rights issues compared with open offers and private placings.

The performance of proprietary compared with mutual life offices

There are reasons to believe that the form of ownership of an organisation may have an impact on its performance but no evidence before now for the UK life insurance industry, which contains proprietary and mutual offices operating in the same environment. This article compares the two groups in terms of average payouts on endowment policies for 1970–92, average cost ratios for 1983–90 and average growth rates between 1981 and 1990. On these three measures the mutuals have performed better during the periods analysed.

Banks' information about borrowers: the stock market response to syndicated loan announcements in the UK

This paper reviews the evidence on whether banks obtain inside information about borrowers and reports event study results on announcements concerning syndicated loans for quoted UK companies. Previous evidence on the response to loan announcements is from the USA and inclusion of announcements during and after syndication expands the range of loan-related news items. There is little response to loan announcements in the UK, even for small quoted companies, which differs in part from the US evidence and provides little support for the view that banks obtain inside information about quoted companies they lend to.

Demand for Dividends: The Case of UK Water Companies: DEMAND FOR DIVIDENDS: UK WATER COMPANIES

High levels of investment in relation to cash flows, combined with high dividend payouts, have caused UK water companies persistently to borrow to meet their cash outflows. This behaviour is not adequately explained by mainstream theories of dividends. The intensive regulatory environment has meant that agency costs and information asymmetry are low, and there has been no clear tax motive for the companies’ regular dividends. It is argued that the large regular dividends are explained primarily by a demand for dividends on the part of investors, and that there are institutional or behavioural reasons for the demand.

Heteroscedasticity and interval effects in estimating beta: UK evidence

The article compares beta estimates obtained from Ordinary Least Squares (OLS) regression with estimates corrected for heteroscedasticity of the error term using Autoregressive Conditional Heteroscedasticity (ARCH) models, for 145 UK shares. The differences are mainly less than 0.10, for betas calculated using daily returns, but even such small differences can matter in practice. OLS tends to overestimate the beta coefficients compared with ARCH models, and selecting an ARCH type estimate makes the most difference for large cap shares. Regarding the measurement interval, the downward bias in betas from daily returns is associated with not only thin trading but also the volatility of the shares daily returns. We infer that the idiosyncratic component in daily returns, as well as lack of trading, is responsible for low daily betas.

Returns after personal tax on UK equity and gilts, 1919–1998

This paper investigates whether personal tax could help explain the size of the historic equity premium in the UK measured before personal tax. If there has been a higher tax burden on equity, some of the premium could be viewed as compensation for tax. It is estimated here that personal tax reduces the arithmetic mean nominal return on equity from 13.3% to 11.1% pa during the period 1919–1998, and the mean return on gilts from 7.1% to 5.6% pa. Thus, personal tax accounts for a slightly higher proportion of the before-tax return on gilts than on equity, implying that the equity premium is not a compensation for a higher tax burden on equity.