Academic journal article Financial Management

Shareholder Wealth Effects of Equity Issues in Emerging Markets: Evidence from Rights Offerings in Greece

Academic journal article Financial Management

Shareholder Wealth Effects of Equity Issues in Emerging Markets: Evidence from Rights Offerings in Greece

Article excerpt

This study investigates the common stock price reaction to announcements of common stock offerings in Greece during the period 1981-1990. Equity offerings in Greece take the form of "rights issues," rather than "general cash offers" which are the subject of most empirical studies analyzing valuation effects of equity offerings in the United States.(1)

An important difference between these two methods of raising equity capital is the possibility of wealth transfers from new to old shareholders, arising from the information asymmetry between management and outside investors. In contrast to general cash offers, in rights issues the new shares are acquired by existing shareholders. Thus, to the extent that all current shareholders exercise their preemptive rights, the wealth transfer effect (described by Myers and Majluf, 1984) becomes irrelevant. Consequently, any stock price effects associated with announcements of rights issues cannot be attributed to this information effect. The ability to isolate this effect makes rights issues an ideal sample for further examination and understanding of the stock price reaction to announcements of equity offerings.

While prior studies, relying on US data, have shown that announcements of general cash offers are associated with a significant price reduction of 3%, on average, of the firms' outstanding common stock, the evidence regarding rights issues is mixed.(2) For example, Nelson (1965), examining all rights offerings in the US for the period 1946-1957, finds that share prices six months after rights offerings are not significantly different from prices six months prior to the offerings. Scholes (1972), investigating US rights issues for the period 1926-1966, finds that prices of shares generally rise before the issue, fall by 0.3% during the month of the issue, but do not change after the issue. Smith (1977), using monthly returns, finds no significant excess returns during the month of a rights offer. White and Lusztig (1980) and Hansen (1988) document a negative reaction to rights offers announcements. Kothare (1991), investigating US rights offerings for the period 1970-1987, reports negative (statistically significant) announcement period abnormal returns. Eckbo and Masulis (1992), examining rights offerings in the US for the period 1963-1981, report negative (marginally significant) announcement period abnormal returns. Marsh (1979) analyzes rights issues in the UK and finds large positive abnormal returns prior to the announcement of the issue, but a statistically insignificant setback in the months surrounding the issue itself. Loderer and Zimmermann (1988) investigate rights issues in Switzerland using monthly stock returns and report insignificant average abnormal returns. Kang (1990), examining rights issues in Korea, finds a significant stock price increase during the period surrounding the announcement of a rights issue.

There is a key difference between the studies on general cash offers and those on rights issues. Studies of general cash offers rely mainly on US data, while studies of rights issues cover various countries. Interestingly, the study from Korea reports strikingly different findings from those of the US and UK studies. This disparity suggests that the mixed evidence on rights offerings may reflect the different institutional characteristics of the associated countries, making further research potentially useful. For several reasons, presented in the next section, Greece is an appropriate country for further investigation of the valuation effects of rights issues.

This study, based on an emerging European capital market with different institutional characteristics from most countries covered by prior studies, contributes to the literature because: 1) it examines investors' reaction to equity offerings, without the complication of information asymmetries, 2) it examines rights issues in a different institutional framework, and 3) it enriches the limited empirical evidence on emerging European capital markets. …

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