The Choice of Seasoned Equity Offerings Methods and Long Term Returns
55 Pages Posted: 9 Apr 2008 Last revised: 29 Mar 2010
Date Written: April 18, 2008
Seasoned equity offerings (SEOs) in the UK provide valuable choices to the issuer in terms of renounceability and control dilution. This is especially the case following the removal of the size restriction of £15 m on share placements to institutional investors in January 1996. We formulate a set of hypotheses from a quality-signalling perspective, affording an analysis of the key interrelations between renounceability, control dilution, shareholder takeup, and subscription price discount. We analyze SEOs from two perspectives: market reaction to the announcement, and identification of the factors driving the choice of issue type. Generally, we find strong support for our predictions - most notably that: high-quality firms signal quality via lower discounts and/or pre-renouncements; high-quality issuers have lower idiosyncratic risk; firms with widely dispersed ownership structures and firms with the largest market capitalizations will choose standalone placements with book-building; and firms with higher (lower) ownership concentration and lower (higher) shareholder takeup will choose fixed-price placements (rights offerings).
Keywords: Rights offerings, Private placements, Takeup, Renounceability, Private benefits of control, Book building, UK
JEL Classification: G14, D82, G32
Suggested Citation: Suggested Citation