Kauppakorkeakoulu | Rahoituksen laitos | Rahoitus | 2016
Tutkielman numero: 14614
Peer valuation effects of seasoned equity offerings
|Otsikko:||Peer valuation effects of seasoned equity offerings|
|Vuosi:||2016 Kieli: eng|
|Asiasanat:||rahoitus; financing; osakkeet; shares; osakemarkkinat; stock markets; yritykset; companies|
|Avainsanat:||seasoned equity offering; peer companies; analysts; industry classification; market reaction; competitive effects; contagion effects; event study|
OBJECTIVES OF THE STUDY In this thesis, I examine whether a seasoned equity offering (SEO) announcement conveys solely firm-specific information or whether it has an effect also on the stock prices of the issuing firm's peers. Furthermore, I also study if the valuation effect is different for primary and secondary SEOs. I employ a novel market-oriented classification of peer companies based on common analyst coverage alongside the traditional hierarchical SIC code based classification, and examine if the peer valuation effects are dependent on the method applied for defining peer companies. Finally, I examine the factors affecting the stock price reactions of peer companies.
DATA AND METHODOLOGY The sample used in this thesis consists of 1,300 domestic SEOs occurring in the Nasdaq, NYSE, and NYSE MKT stock exchanges in 2007-2014. The sample of SEOs is obtained from the SDC Platinum database. The stock price data is obtained from the Center for Research in Security Prices (CRSP), the financial data from the Standard & Poor's Capital IQ's Compustat, and the analyst coverage data from the Institutional Brokers' Estimate System (I/B/E/S). To analyze the stock price reactions of peer companies, two peer portfolios are constructed for each issuing firm: one consisting of firms operating in the same four-digit SIC code industry, and another consisting of firms that are followed by the same individual analysts than the issuing company is. I follow the traditional event study methodology to assess the peer valuation effects arising from SEO announcements. In addition, I employ an ordinary least squares (OLS) cross-sectional regression to analyze the factors affecting the short-term price reactions of peer companies.
KEY FINDINGS My study shows that the information conveyed by SEO announcements is not merely firm-specific but pertains to rival firms as well. I find that SEO announcements result in contagion as peer companies experience significantly negative stock price revisions on average. Moreover, I find that the peer valuation effects are on average significantly more negative for primary SEOs than for secondary SEOs. However, when the insiders of the issuing firm sell their shares in a secondary SEO, investors react more profusely and the stock price reaction of peers is more negative. Furthermore, I find that an SEO announcement does not convey uniformly negative information about the peers, but competitive effects alleviate the negative price reaction caused by contagion effects. Finally, I find that both the peers obtained by the analyst-based classification method as well as the peers sharing the same four-digit SIC industry with the issuer react similarly to SEO announcements.
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