Seasoned Equity Issues in a Closely Held Market: Evidence from France

Abstract

This paper studies the shareholder wealth effect associated with 278 seasoned equity issues in France from 1986 to 1996. The sample includes public offerings and rights issues of common stock alone and of unit. On average, there is a negative stock price change of 0.58% at the first announcement date of common stock rights issues. There is no significant return at the announcement date of public offerings or unit rights issues. We find strong evidence of negative abnormal returns at the issue date and during the subscription period for common stock issues, whether rights or public. Abnormal returns at the announcement and issue dates are related to the main characteristics of the offerings and especially to the corporate control mechanisms. In France, public offerings are chosen by larger firms and result in a more diffuse ownership. Furthermore, abnormal returns at the announcement of a public offering are not related to company specific risk, but are negatively related to the expected take-up of the current shareholders. In a closely held market such as the French market, public offerings result in a less concentrated ownership, which is better news for investors than rights issues. Conversely, the expected shareholder take-up does not affect abnormal returns in the case of rights issues. In this case, the market reacts less negatively when company specific risk is lower, stock price performance prior to the announcement is weaker and the aim of the issue concerns either an investment project or an acquisition. These results shed new light on the equity financing paradox in a closely held market.

JEL Classification: G32, G14, D80