Academic journal article Financial Management

Why Do US Firms Choose Global Equity Offerings?

Academic journal article Financial Management

Why Do US Firms Choose Global Equity Offerings?

Article excerpt

This study examines the economic motivation for global seasoned equity offerings made by US firms. We find that firms announcing global offerings have significantly less negative market reactions than had they limited the issues to domestic only. The extent of the reduced price drop at issue announcement is found to be negatively associated with pre-announcement price run-up, firm size, and market-to-book equity, but positively associated with unsystematic risk. We also find that global issuing firms outperform their domestic counterparts for up to three years following the offerings.

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Chuck C.Y. Kwok (*)

As an increasing number of foreign companies have raised equity capital in the US capital market, many US companies are seeking global dissemination of their new equity through a procedure that commonly sets aside a proportion of the total shares for targeted foreign investors (global tranche) with simultaneous issue of the remaining shares in standard registered form in the US domestic market (domestic tranche). Although the two tranches are marketed separately by two syndicates of underwriters, the global tranche is usually led by the overseas affiliates of the lead US underwriters of the domestic tranche to ensure tight control over the allocation of shares. The offer price is the same to all investors, regardless of nationality, because the Rules of Fair Practice of the National Association of Securities Dealers (NASD) do not allow price discrimination.

Since there is generally no obstacle to foreign investors purchasing shares directly in the US market, one might wonder about the motivations for and potential benefits of global issues. We develop three hypotheses regarding the motivations of global offerings.

The name recognition and accessibility hypothesis suggests that global issues enhance investor recognition and participation in both the primary and the secondary markets. The alleviation of asymmetric information hypothesis posits that the ability to issue global shares may serve to validate firm quality, reducing the information asymmetry between insiders and investors. The window of opportunity hypothesis postulates that firms may switch to global offerings when domestic demand for their new shares is weak.

We examine the economic effect of global issues by comparing a sample of global seasoned equity offerings made by US industrial companies from 1985 through 1995 and a domestic control sample that includes all purely domestic offerings during the same period.

Our study is closely related to Chaplinsky and Ramchand (2000). (1) They compare the announcement effect of 349 global offerings and a sample of 459 purely domestic offerings made by US companies from 1986 through 1995. They find that the negative price reaction that typically accompanies equity issuance is reduced by around 0.8 percentage point when some shares are sold abroad through a global tranche.

Our study is different from Chaplinsky and Ramchand (2000) in several ways. First, we include all domestic seasoned equity offerings in the control sample, thus considerably increasing the number of domestic offerings for comparison. To enhance the robustness of our results, we also match each global issue by a purely domestic issue based on firm size.

Second, we use Heckman's (1979) two-stage procedure to control for potential self-selection bias. We use the maximum-likelihood method to estimate the model so that the results are both consistent and efficient. We find that firms announcing global issues can reduce the negative market reaction by about one percentage point, as compared to purely domestic issues.

Third, we explore other possible motivations of global offerings. Chaplinsky and Ramchand (2000) attribute the benefit of global issues to an increased number of foreign shareholders following global issues. Our results indicate that, while firms announcing global issues on average have less negative market reactions, the extent of the reduced price drop at issue announcements is negatively associated with pre-announcement price run-up, firm size, and market-to-book equity, but is positively associated with unsystematic risk. …

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