Wealth Effects of Seasoned Equity Offerings: A Meta‐Analysis

• Author: Chris Veld,Yuriy Zabolotnyuk,Patrick Verwijmeren
• DOI: http://doi.org/10.1111/irfi.12218
• Published date: 01 March 2020
• Date: 01 March 2020

Wealth Effects of Seasoned Equity

Offerings: A Meta-Analysis*

CHRIS VELD

†

,PATRICK VERWIJMEREN

‡,§,¶

AND YURIY ZABOLOTNYUK

k

†

Department of Banking and Finance, Monash Business School, Monash University,

Melbourne, Victoria, Australia

‡

Erasmus University Rotterdam, Rotterdam, The Netherlands

§

University of Melbourne, Melbourne, Victoria, Australia

¶

University of Glasgow, Glasgow, UK and

k

Carleton University, Ottawa, Ontario, Canada

ABSTRACT

We use meta-analysis to review studies on announcement effects associated

with seasoned equity offerings. Our sample includes 199 studies from 38 lead-

ing finance journals and Social Sciences Research Network working papers.

The studies cover different countries, but the US is particularly well-

represented with 131 studies. We find a statistically significant mean cumu-

lative abnormal return of −0.98%. Abnormal returns are more negative for

equity issues by US companies and for non-US rights issues and are less nega-

tive for private placements. In addition, wealth effects are more negative

when the proceeds are used for debt reduction, when the SEO is issued

shortly after IPO, and for issues by nondividend-paying companies and

industrial companies. We identify important avenues for future research.

JEL Codes: G14; G30; G32

Accepted: 9 June 2018

I. INTRODUCTION

Companies that need capital often turn to Seasoned Equity Offerings (SEOs) to

fulfill their financial needs. Over the period 2000 to 2011, US companies alone

raised $1146 billion with SEOs.

1

* The paper has benefitted from comments and suggestions from Seth Armitage, Abe de Jong, Eric

Duca, Marie Dutordoir, Giancarlo Giudici, Frank Hong Liu, Brian Lucey, Daniel Hung, Alper Kara,

Igor Loncarski, Geoffrey Poitras, Jay Ritter, and of participants at the Multinational Finance Confer-

ence in Halkidiki (June 2015), the International Review of Financial Analysis Symposium on Meta-

analysis in International Finance in Poznan (June 2018), and seminar participants at the University

of Glasgow, University of Loughborough, and Simon Fraser University. The authors gratefully

acknowledge the excellent research assistance of Tim Kooijmans, Gillian MacIver, Hang Pham, and

Angel Zhong. Special thanks go to the Associate Editor and the anonymous referee for their very use-

ful comments.

1 Over the same period, they raised $510 billion with convertible debt issues and $6635 billion

with straight debt issues (Dutordoir et al. 2014).

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:1, 2020: pp. 77–131

DOI: 10.1111/irfi.12218

SEOs are particularly important for firms that want to finance growth oppor-

tunities. Interestingly, a wide range of studies around the world find that

announcements of SEOs are associated with negative abnormal stock returns.

For example, an overview paper of Eckbo and Masulis (1995) finds average

abnormal returns of −3.1% for US SEOs. These negative abnormal returns are

generally explained by two theories. The theory of Myers and Majluf (1984) is

based on asymmetric information between managers and shareholders. In their

model, a SEO is perceived as bad news because the market will assume that

managers, who have better information than shareholders, try to sell overpriced

equity. The market timing theory of Baker and Wurgler (2002) argues that man-

agers try to time the market and issue equity when valuations are highest. This

theory is also consistent with negative abnormal returns around the announce-

ment of an SEO.

Many empirical studies outside the US also find negative abnormal returns,

but the results in several countries paint a different picture. A potential explana-

tion for differences across countries relates to the characteristics of the offerings.

For example, the popularity of rights offerings varies across countries. However,

to confuse matters, attributes have been linked to more positive announcement

effects in some studies, while they are linked to more negative announcement

effects in other studies.

In this paper, we aim to systematically analyze the many papers on SEOs

that present different findings for different countries and for different attributes

of SEOs. For this purpose, we use meta-analysis. Until now, this technique has

not been used very often in finance research, but it is more widely applied in

other disciplines, such as epidemiology, education, and management.

2

The spe-

cific type of meta-analysis that we use is generally referred to as replication

analysis. In this replication analysis we conduct regression analyses that sum-

marize a wide range of existing studies. The abnormal returns that are reported

in previous empirical studies are the dependent variable in these regression ana-

lyses. This type of meta-analysis combines insights from a wide range of studies

and allows us to draw statistically strong conclusions on systematic country dif-

ferences and/or differences associated with other characteristics of SEOs.

A related advantage is that this type of analysis is more objective than a tradi-

tional literature review and allows for a test of a potential publication bias.

We look for papers that present event period abnormal returns associated

with SEO announcements. The first source is a list of 38 leading academic

finance journals. The second source consists of unpublished working papers

(per December 31, 2017) that are available on the Social Sciences Research Net-

work (SSRN). We find 199 studies that present abnormal returns associated with

SEOs of which 161 papers are published in our list of journals and 37 studies

are found on SSRN. These studies include a total of 861 subsample results. The

mean abnormal return for SEOs is −0.98% and the median is −1.39%.

2 One recent exception in finance is the meta-analysis of relationship lending by Kysucky and

Norden (2016).

© 2018 International Review of Finance Ltd. 201878

International Review of Finance

Several findings emerge from our regression analysis. We find that rights

issues are associated with more negative abnormal returns. Private placements,

on the other hand, are associated with less negative announcement returns.

When we study the interaction between rights issues and US studies, we find

that this interaction term is positive, but we also establish that US issues in gen-

eral are associated with more negative abnormal returns.

Interestingly, we do not find that information asymmetry has a significant

effect on announcement returns. We do find evidence that SEOs that are done

for paying back debt are associated with more negative abnormal returns. This

result is in line with firms not fully exploiting the corporate tax shield associ-

ated with debt financing (Graham 2000). Dividend-paying companies that issue

equity generally see less negative abnormal returns than nondividend-paying

companies that issue equity.

Another interesting aspect of our study is that it allows for a comparison

between the announcements returns in different types of publications. All else

equal, we find that the announcement returns in top four journals are higher

than those published in other journals and in SSRN working papers.

Our paper provides avenues for future research. The fact that a dispropor-

tional number of studies are on US data, combined with the differential wealth

effects around the world, suggests that there is still ample room to study wealth

effects in other countries, especially when institutional features differ. For

example, we document that the effects of rights issues differ between US and

non-US issuers. This finding calls for a worldwide study on rights issue, espe-

cially as countries differ in the extent to which existing shareholders in a rights

issue are entitled to sell their rights if they do not wish to obtain more shares.

Future research opportunities are also provided by factors that show up as sig-

nificant in our meta-analysis but that have not been researched extensively. An

example is the relevance of the stated use of proceeds. A further examination of

these factors could lead to an even better understanding of the cost of issuing

equity.

The remainder of this study is organized as follows: Section II briefly reviews

the studies on the wealth effects that are associated with announcements of

seasoned equity issues. Section III includes a discussion of the factors that have

the potential to explain these wealth effects. The model for the meta-analysis is

included in Section IV. Section V describes the results, and the paper is con-

cluded in Section VI with a discussion of the implications of the results.

II. WEALTH EFFECTS OF SEOs

An extensive set of event studies on announcements of SEOs have been under-

taken. All these studies document results for abnormal returns associated with

the announcement. Some of these results are positive and significant, some are

negative and significant, and others are not significant. We review these studies

by using a meta-analysis technique. We follow the approach of Datta

© 2018 International Review of Finance Ltd. 2018 79

Wealth Effects of Seasoned Equity Offerings