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Discussion Xueping Wu City University of Hong Kong NTU 2008, Taipei, Taiwan

Seasoned Equity Offerings, Quality Signaling, and Private Benefits of Control by B. Balachandran, R. Faff, M. Theobald, and E. Velayutham. Discussion Xueping Wu City University of Hong Kong NTU 2008, Taipei, Taiwan. The Issue. Literature: SEOs: Method Choice and Valuation Effects

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Discussion Xueping Wu City University of Hong Kong NTU 2008, Taipei, Taiwan

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  1. Seasoned Equity Offerings, Quality Signaling, and Private Benefits of Controlby B. Balachandran, R. Faff, M. Theobald, and E. Velayutham Discussion Xueping Wu City University of Hong Kong NTU 2008, Taipei, Taiwan

  2. The Issue Literature: 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

  3. Specifics SEO 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: • DISC=Issue price discount (%) • IDRISK=mkt model residual risk, or std [-260, -61] • %PR=pre-renounced %shares by insiders • Takeup=%shares taken up by existing investors

  4. 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;)

  5. Comments • 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?)

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