Prior studies suggest that theories on equity offerings applicable to the US are not
always applicable to the UK. Further, to my knowledge, little evidence exists on pure
UK private placings and, no evidence on blocks of already listed shares (secondary
offers). This study considers this lack o f evidence and contributes to the extant
literature by investigating these two types o f equity offerings. More specifically, the
study focuses on three main themes: the placing offered discount or premium, the
long-run abnormal performance surrounding the offers and, whether the US puzzling
reversal of private placement abnormal returns (AR) is also valid in the UK.
With regards to the first theme, OLS analysis suggests that information costs and
liquidity costs are the main determinants o f the discount of private placements.
Concerning the secondary offerings, they are also mainly priced at discount.
However, the secondary offering discount appears to reflect uncertainty about the
stock value. The findings contradict the US evidence that imply stonger monitoring
costs, especially for the secondary sample. Premiums reflect extraction of private
benefits, regardless of the offer type.
Regarding the second theme, the performance of private placing firms peaks at the
offer year and turns negative few years later. The findings suggest the firms time the
offer when the stock is overvalued and indicates high selling growth opportunities.
While the findings for secondary offers suggest post-offer underperformance, the
firms also engage into downwards earnings management the year before the offer.
These factors explain the post-offer underperformance.
Finally, concerning the third theme, the reversal is also observed in the UK.
However, when liquidity and pre-event momentum risk factors are taken into
account, the post-offer underperformance disappears. The findings strongly suggest
that the traditional models used to measure long-run AR are misspecified. They are
unable to adjust for reduction in liquidity risk which changes the risk factor loadings.
Hence, the reported AR are downwards biased.
As a conclusion, the study adds to the body of knowledge within the equity offerings
area. It also contributes to theories such as signalling, agency and market efficiency.
Finally, it provides methodological suggestions.