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Seasoned Equity Offerings, Quality Signalling and Private Benefits of Control

Balashingham Balachandran, Robert Faff, Eswaran Velayutham - Monash University Michael Theobald - University of Birmingham. Seasoned Equity Offerings, Quality Signalling and Private Benefits of Control. Institutional Background in UK.

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Seasoned Equity Offerings, Quality Signalling and Private Benefits of Control

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  1. Balashingham Balachandran, Robert Faff, Eswaran Velayutham - Monash UniversityMichael Theobald - University of Birmingham Seasoned Equity Offerings, Quality Signalling and Private Benefits of Control

  2. Institutional Background in UK • British firms use four main seasoned equity offering (SEO) methods to raise equity finance: • (a) rights offerings, • (b) open offers, • (c) open offers with private placements, and • (d) standalone placements. • Unlike the US, public offerings known as firm commitment offers are rare in the UK.

  3. Institutional Background in UK • In the UK, if blockholders or directors do not wish to take up their shares and thus decide to sell those shares to institutional investors, this situation is disclosed at the time of the SEO announcement – known as a “pre-renouncement”. • British firms use either accelerated book-building or a fixed price method to issue standalone placements.

  4. Institutional Background in UK There are no limits on the offer proceeds for rights and open offerings, but, in the case of placements, the offer proceeds are limited to 5% p.a., or 7.5% per 3 years, of existing market capitalisation. However in the case of placings related to acquisitions or mergers the offer proceeds are limited to 10% (without shareholders approval).

  5. Institutional Background in UK Open offerings and placements normally have an upper limit of 10% on the discount permitted by UK listing rules unless the LSE is satisfied that the issuer is in severe financial difficulties or there are other exceptional circumstances, while there is no limit on the discount for rights offerings.

  6. Institutional Background in UK • Prior to 1990, a maximum monetary value of £3 m was imposed by the LSE on the total value of shares being placed. A higher ceiling of £15 m applied for the period 1990–95. • In January 1996 all size limitations were effectively removed, paving the way for an unconstrained choice of issue method by publicly listed firms • In a placement in the UK, the issuing firm is not required to prepare or distribute a prospectus. Members of the general public are not allowed to take part in the placing. Shares are placed to institutional investors and other investors who are lawfully entitled to participate.

  7. Motivation The ability to choose from • rights offerings (renounceable) with/without “PR” • open offers (non-renounceable rights, with a claw back private placement) with/without “PR” • a combination of open offers with private placements with/without “PR” • standalone placements with accelerated book building • standalone private placements with fixed price, affords the management of British firms the opportunity to considerably enhance signals of quality in the context of the well-known asymmetric information models developed in the corporate finance literature.

  8. Motivation Accordingly, using a large sample of all these SEO methods from the UK market, this study investigates the unique interaction between the renounceability of rights offerings, control dilution and existing shareholders takeup. By focusing on these specific characteristics, we provide new empirical evidence on, and develop further insights regarding, the existing theory on the choice of seasoned equity offerings.

  9. Price Reaction

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