Wealth transfer in Australian equity issuances

This thesis examines the causes and consequences of two popular equity-raising methods used by publicly listed firms in Australia, namely rights offers (ROs) and private placements (PPs), with a particular focus on their wealth transfer outcomes for retail shareholders. While the wealth transfer problem is controversial and subject to substantial debate among policymakers and shareholder activists, systematic empirical evidence in the academic literature is lacking. The presence of wealth transfer in ROs is less obvious as ROs have a pro-rata structure. However, there exist RO structures that potentially benefit institutional shareholders but disadvantage retail shareholders, making the study on wealth transfer particularly interesting. Unlike ROs, wealth transfer results mechanically from the issuance of PPs because of the discount of the offer price and the fact that retail shareholders are restricted from participation. Firms have a choice between a Standalone PP and a Packaged PP. A Packaged PP consists of a private placement and a share purchase plan, which allows retail shareholder participation in new shares up to a stipulated amount. As such, all else equal, a Packaged PP should alleviate wealth transfer. As such, the discretion for firms to choose between a Standalone PP and a Packaged PP provides an opportunity to test whether firms have an incentive to guard their reputation by choosing an issuance method that protects retail shareholders. Two samples are used to examine these issues. Wealth transfers in a sample of 427 ROs and 4,499 PPs issued over the period 1999-2007 are estimated. Determinants of wealth transfers are investigated. The daily ownership dataset from CHESS is used to measure dilution and to obtain the data for institutional shareholdings immediately prior to the issuance. Market reactions around the announcement of these issues are examined using the Market Model. The relation between wealth transfer and abnormal return is investigated using a quantile regression model. In the sample of ROs, trading activities between the announcement date and the ex-entitlement date are analysed. CHESS is used to identify whether the trading activities are driven by institutions’ buying or selling shares. In the sample of PPs, probit analysis is used to examine the determinants of firm choice between a Standalone PP and a Packaged PP. Finally, the determinants of firm choice between a RO and a PP are investigated using a probit model, and a nested logit model provides robustness checks. This thesis shows that wealth transfer is not economically large in ROs, which explains the popularity of ROs among Australian firms. This research extends the literature on equity tunneling, particularly when the offers without a shortfall facility (NSF) have a larger discount and are chosen by firms with higher institutional ownership and concentration. However, we do not find evidence that the institutional investors buy shares between the announcement date and the ex-entitlement date to increase the allocation of rights. Furthermore, the market does not react negatively to the wealth transfer. Overall, the first research question finds evidence consistent with the conventional belief that wealth transfers in ROs are trivial. While most relevant studies focus on the information asymmetry framework in explaining the choices and consequences of issuance methods, this thesis examines the corporate reputation hypothesis in explaining the choices between Simultaneous PP-SPPs and Standalone PPs. However, in contrast to expectations, we find that Simultaneous PP-SPPs in aggregate, result in a larger wealth transfer than Standalone PPs due to the larger average discount and average offer size. Finally, the thesis contributes to the overvaluation literature by showing the preference of overvalued firms for Simultaneous PP-SPPs. The corporate reputation hypothesis, however, does not explain the choices between PPs and ROs. Instead, the tendency to choose a PP over a RO is explained by the willingness of institutions to invest in large blocks of shares of less risky firms. In addition, the evidence suggests that institutions are attracted to high performers in the past year. While some firms may choose PPs over ROs partly due to the lower issuance cost, those that prefer Simultaneous PP-SPPs to ROs are not motivated by the same reason. Rather, Simultaneous PP-SPP issuers are likely to take advantage of their overvalued equity. These findings should be of interest to academics, government authorities, policy makers, regulators, and investors.