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Evidence on the determinants of equity issue method in the UK

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  • B. M. Burton
  • D. M. Power
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    Abstract

    Eckbo and Masulis (1992), Burton et al. (1999) and Armitage (1999) reported that the method used to issue new shares is one of the key determinants of the market reaction to seasoned equity offer announcements. This article develops this earlier line of research by examining a sample of 193 rights issues and 329 placings of shares made by UK firms between 1995 and 1996. It (i) details the relative popularity of rights and placings amongst London-quoted firms; (ii) compares the characteristics of the equity issues made under the different methods; (iii) examines variations in the attributes of firms which place their shares or offer them to existing investors via a rights issue and; (iv) uses logit analysis to investigate whether the determinants of offer method choice can be modelled accurately. A holdout sample of 59 placings and 29 rights issues is employed to examine the predictive ability of the logit model results. The evidence suggests that identifiable differences exist in both the size of the issue and the characteristics of the issuer, but that these differences provide only limited ability to predict equity issue methods accurately.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 13 (2003)
    Issue (Month): 2 ()
    Pages: 145-157

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    Handle: RePEc:taf:apfiec:v:13:y:2003:i:2:p:145-157

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    Web page: http://www.tandfonline.com/RAFE20

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118.
    2. Eckbo, B. Espen & Masulis, Ronald W., 1992. "Adverse selection and the rights offer paradox," Journal of Financial Economics, Elsevier, vol. 32(3), pages 293-332, December.
    3. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    4. Seth Armitage, 2000. "The direct costs of UK rights issues and open offers," European Financial Management, European Financial Management Association, vol. 6(1), pages 57-68.
    5. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
    6. Denis, David J., 1994. "Investment Opportunities and the Market Reaction to Equity Offerings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(02), pages 159-177, June.
    7. Baxter, Nevins D & Cragg, John G, 1970. "Corporate Choice Among Long-Term Financing Instruments," The Review of Economics and Statistics, MIT Press, vol. 52(3), pages 225-35, August.
    8. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-44, March.
    10. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    11. Taub, Allan J, 1975. "Determinants of the Firm's Capital Structure," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 410-16, November.
    12. Choe, Hyuk & Masulis, Ronald W. & Nanda, Vikram, 1993. "Common stock offerings across the business cycle : Theory and evidence," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 3-31, June.
    13. Bruce Burton & A. Alasdair Lonie & David Power, 1999. "Does the issue method influence the market reaction to seasoned equity offer announcements?," Applied Economics Letters, Taylor & Francis Journals, vol. 6(7), pages 459-462.
    14. Michael S. Long & Ileen B. Malitz, 1983. "Investment Patterns and Financial Leverage," NBER Working Papers 1145, National Bureau of Economic Research, Inc.
    15. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
    16. Seth Armitage, 1998. "Seasoned equity offers and rights issues: a review of the evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 4(1), pages 29-59.
    17. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," The Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January.
    18. Bhagat, Sanjai, 1983. "The effect of pre-emptive right amendments on shareholder wealth," Journal of Financial Economics, Elsevier, vol. 12(3), pages 289-310, November.
    19. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    20. Bayless, Mark & Chaplinsky, Susan, 1996. " Is There a Window of Opportunity for Seasoned Equity Issuance?," Journal of Finance, American Finance Association, vol. 51(1), pages 253-78, March.
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    Cited by:
    1. Bruce Burton & Christine Helliar & David Power, 2004. "The benefits and costs of deeply-discounted rights issues - practitioners viewpoints," Applied Economics Letters, Taylor & Francis Journals, vol. 11(6), pages 369-372.

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