This paper examines the comprehensive perspectives of seasoned equity offerings (SEOs) on the Thai stock market over the period 1999–2014. KEY WORDS: Seasoned Equity Offering (SEO)/ Event Study/ Buy and Hold Abnormal Return (BHAR)/ Offering Type.
LIST OF ABBREVIATIONS (cont.)
INTRODUCTION
Sources of Fund
This order is logically based on the cost of capital for each source of funds. The question would be why many firms issue more shares given that the cost is on average the highest among other sources of funds.
Equity Offerings and Priority
In other words, the additional shares issued are used to adjust the capital structure of firms. To summarize, common stock is a security that entrusts the owners with the ownership of the corporation.
Motivation and Scope of Study
Discussions of the limitations and possibilities of future research – exploring ideas not yet included in this study – are explained in Chapter 5.
LITERATURE REVIEWS
Regulatory Aspects of SEO
- SEO Filing Process
- Regulatory and Principles Associated with SEO Process
In addition to the distribution of securities or shares, the Company is responsible for reporting sales and updating information in accordance with Section 56 of the Securities and Exchange Act 1992. The Company is responsible for reporting the results of the offering to SEC within 15 days after the closing date of the PP. .
Understanding Seasoned Equity Offerings (SEOs)
- Different Issue Methods
- Different Issue Types
- Costs of SEO and Rights Offer Paradox
- Return on SEO
- Theories Related to SEO
Sophisticated investors will then lower their estimate of the company's value when there is an SEO announcement. Dierkens (1991) and Raymar (1993) indicated that a company's capital structure is one of the factors that determine the response of its stock price to external financing.
Announcement Effects of SEOs
They summarized that investors react positively when the actual discount is less than the expected discount. There are several empirical studies: Asquith and Mullins (1986), Masulis and Korwar (1986), Mikkelson and Partch (1986), Brous and Kini (1994) and Limpaphayom and Ngamwutikul (2004) that show that investors react negatively to the announcement of experienced share offerings. Regression results indicate that the announcement day price reduction is inversely related to the stock price performance in the past year - for industrial issues.
After pre-announcement stock prices rise, and the announcement day price reduction tends to be smaller, which is consistent with Myers and Majluf (1984) who stated that companies time stock offerings to minimize adverse impact on stock prices.
Empirical Results of SEO
The study concludes that low-growth and high-leverage companies are the worst performers in the advertising and issuance of SEOs. In addition, the market reacts negatively to SEO by Shahid et al. whereas Mola and Loughran (2004) studied the Italian market; the average offer price of new shares is discounted by 3% from the last day's closing price.
Other evidence includes research in the Netherlands by Kabir and Roosenboom (2003) and in Hong Kong by Ching et al.
Evidence of Positive Returns of SEOs
Average announcement effect for firms using the fixed price method is positive, while the announcement effect is zero for the firms using the formula price method. Recent study in the USA by Jiao and Chemmanur (2005) also indicated that the announcement effect of equity issue will be negative, while the magnitude of the effect varies between firms depending on the degree of information asymmetry that the firm faces on asset-in-place and on the NPV of its new projects, for example. First, the announcement effect will increase (i.e. more positive or less negative) in realizing the soft information signals available to outsiders.
Second, the notification effect will increase with higher accuracy of soft information signals of strangers.
Underpriced SEO and Offer Price Discount
Empirical studies based on the theoretical approach of Myers and Majluf (1984), Parsons and Raviv (1985), and Rock (1986) observed that the initial offer price was lower than the market price that prevailed before the arrival of the new issue. They found that industrial and utility companies offered an average NASDAQ SEO discount of 1.64% between 1980 and 1984. Bundgaard (2012) found the average SEO discount in a small sample to be 5.55%, which is significantly higher than that found by Corwin (2003), Altinkiliç and Hansen (2003).
These trends were noted by Corwin (2003), and seem to be confirmed by subsequent studies.
Long-run Underperformance Following the SEO
In the case of issuing new equity, Bowen, Chen and Cheng (2008) stated that firms must offer a discount to overcome hesitant and uninformed investors, which leads to lower returns for the firm, and therefore a higher cost of SEO. In summary, the cost of capital is negatively affected by information asymmetry among investors as uninformed investors will be reluctant to trade due to higher potential transaction losses. Li and Zhao (2006) observed that firms participating in SEO show significant long-term stock underperformance, which may be influenced by size, book-to-market ration, and past returns.
Although SEO underperforms during the first few years, the trend has reversed significantly and actually reports significant outperformance by the sixth year compared to non-issuers.
SEO Cancellation
Ehrhardt and Przyborowsky (2000) obtained a very similar underperformance after 3 years, ranging from -6.02% to -4.57%, depending on the portfolio size group. The difference in means is not statistically significant, but the difference in means is significant at the 6% level.
SEOs and Ownership Structure
Specifically in French, Gajewski and Ginglinger (2002) found that abnormal returns at the public offering announcement have a negative relationship with expected current shareholder uptake. Public offerings resulted in less concentrated ownership, which is better news for investors than real issues. Thus, real problems perform worse; however, the market reaction is less negative when the company's specific risk is low or when the fund is targeted at investment projects or acquisitions.
They found that a company with a controlling family will 47.9% choose RO over PP; and at 44.1% will choose uninsured over insured RO – both are 3 times more likely to choose RO or uninsured RO, respectively.
RESEARCH METHODOLOGY
Event Study
As a result, the market's reaction to the event can be measured by stock returns over the period of investigation. The impact of the event on dependent variable will be examined in this event window. An abnormal return for a single case is the difference between the actual return at time t, in the event window, and the expected return of the individual stock, which is shown in equation (1).
The cumulative abnormal return, CAR, for an individual stock is the sum of all abnormal returns in the event window.
Introducing Buy-and-Hold Abnormal Return (BHAR)
These T-values are compared to test statistics to determine whether there is sufficient evidence to reject the null hypothesis. This implies that the null hypothesis will be rejected more often, making the power of the test asymmetric, Kothari and Warner (1997). There are some further arguments from Mitchell and Stafford (2000), and Knif and Pynnonen (2013). They mentioned that the economic meaning speaks about the risk, which BHAR takes into account through cross-sectional variance.
This cross-sectional variance is proportional to the returns, but the variance (risk) will be diversified away to zero by the law of large numbers.
RESULTS
Data and Samples
The information consists of the name of the security or share, the date when the decision was agreed in the committee to issue additional shares, the type of securities, the number of shares offered, the ownership ratio, the strike price, the date of the share distribution, the reservation period, the price before SEO and the price on the SEO date. The data is then categorized into different dimensions based on other research to check whether the finding is applicable and true in the Thai stock market and for the purpose of the study, which can serve as guidelines for listed companies to make a more decisive decision on various fundraising alternatives. Security prices end at Z_CLOSED_SIGN, which is the closing price on the day investors see the sign (D_SIGN).
I_SEC_TYPE_RIGHTS are the types of securities held by SEO investors: S for common stock, P for preferred stock, U for mutual funds, W for warrant, D for debentures, C for convertible debentures, and R for transferable subscription rights.
Descriptive Statistics
Security prices end at Z_CLOSED_SIGN, which is the closing price on the day investors see the sign (D_SIGN). Z_CLOSED_BEFORE_SIGN is the closing price of the security on D_SIGN-1. SEO was popular in real estate and construction, services, industry and finance, accounting for more than half of all events. From my empirical study, the result showed that, on average, the negative return of seasoned stock offers in Thailand is -0.6% and -5.4%, respectively, calculated from the past 1-day and 6-month average abnormal return at 1%.
This is referred to from the day when shareholders are allocated new shares.
Hypothesis Development
As a result, they can learn the true value of the firm as well as predict the firms future cash flow. Given that all the assets, including financial assets, can be converted into currency. The market reacts positively and the share price continues to rise after the announcement." In other words, the firms that issue out of the money guarantee the capital inflow after the good news.
On the contrary, individual trades are negatively associated with stock returns due to the information inferiority.
Results
- Result of H1: Impact of SEO on Announcement and Issuance Date On the first hypothesis, two event dates are compared to see the magnitude
- Result of H2: Private Placement has the Lowest Negative Returns among Others
- Result of H3: Dilution Effect
- Result of H4: The Impact of SET Index
- Result of H6: Comparing Rights Offering with Common Stock vs
- Result of H7: SEO and the Impact of Investor Types (Market Microstructure)
- Result of H8: The Comparison between Primary and Secondary SEO
- Result of H9: The Impacts of Firms’ Liquidity and Market’s Liquidity
- Result of H10: The Impact of Firm Size to the SEO (Market Capitalization)
- Result of H11: SEO Over the Time Horizon – Short-term vs
The results clearly show that the dividend paying firm has a higher abnormal return compared to the non-dividend paying firm by about 24% to 26% for private investment in the long run at a significant level of 1% as shown in Figure 4.11 , panel A. While, on the other hand, the rights offering with either common stock or warrants, the return of the dividend-paying firm is lower in the long run at the 1 percent significant level, as in panels B and C of Figure 4.11. The cumulative number in terms of size is gradually increasing - as shown in Table 4.10 and shown in Figure 4.12.
It is also illustrated in Figure 4.17, where the results can be categorized into two groups:. Inventory turnover differs from company to company; as a result, results will vary widely if any kind of calculations can be used – the comparison will be unfair and market demand and supply will come into play. For the long run study, at a significant level of 1%, firms with lower cash conversion cycle tend to perform better from 1 year to 5 years – this is also shown in Figure 4.18 Panel D.
DISCUSSIONS
CONCLUSIONS
No matter the characteristics of SEO, XRS has less negative return than that of XRW. The firms with lower liquidity (as measured by quick ratio, current ratio, cash ratio and cash conversion cycle) tend to perform worse. This is contrary to previous research, but is supported by risk-return trade-off theory, Gibrat's law, internal finance theory of growth, and the potential to grow of the smaller firms.
Please note that this is the result of the stock exchange in Thailand below.
Analyst coverage and the cost of raising equity capital: Evidence on the underpricing of seasoned equity offers. Secondary stock market liquidity and seasonal equity issuance costs – European evidence (PhD dissertation, NYU Stern School of Business). Seasoned equity offers and their impact on firm value (PhD dissertation, Université de Neuchâtel).
Ownership structure and post-issue operating performance of seasoned equity issuance companies in Thailand.
