Seasoned Equity Offerings, Quality Signaling, and Private Benefits of Control

by B. Balachandran, R. Faff, M. Theobald, and E. Velayutham

Discussion

Xueping WuCity University of Hong Kong

NTU 2008, Taipei, Taiwan

The IssueLiterature:

SEOs: Method Choice and Valuation Effects Many theories/stories for N phenomena A Major theory/story for many phenomena

This paper:

Focus on the UK where issuers use many methods in SEOs

SpecificsSEO methods in the UK:(1) Rights Offer (w or w/o pre-renouncement, PR)(2) Open Offer (w or w/o PR, w or w/o PP)

PP=private placement(3) Placement (private or public)

Key variables:(1) DISC=Issue price discount (%)(2) IDRISK=mkt model residual risk, or std [-260, -61](3) %PR=pre-renounced %shares by insiders(4) Takeup=%shares taken up by existing investors

Main Findings

Announcement effects: 3-day CARs, Table 5 Rights offer: -1.59% Open offer: + 1.85% (but w/ PP: -0.89%) Placement: +0.29% (Private); -2.05% (Public)

Determining factors (regardless of methods, Table 6): DISC (-) CARs IDRISK (-) CARs

Quality signaling

(3) Takeup (+)CARs (Table 7)

Takeup theory

(4) LMV (firm size) (-)CARs

Asymmetric information about growth is good not bad!

(Wu and Wang, 2005; Wu, Wang and Yao, 2005;)

Comments(1) Overall A rich set of empirical findings(2) Challenges: hard to pin down why DISC Uncertainty <=/=> Quality or Value

Certification for CAR can go either way! (Heinkel&Smith, 1986 vs Hertzel&Smith, 1993) Takeup (not relevant for uninformed investors)

a) It is %PR that should be informative.b) Why not expected takeup in the CAR regression?

Private benefits of control (control dilution aversion) under-explored here (e.g. OOPP-NP=worst case?)