Empirical essays on motives for security offerings

Abstract

This thesis includes three empirical papers on U.S. security offerings examining the following issues: "Cash-rich seasoned equity issuers", "Excess cash holdings and corporate security choice", and "Taking money off the shelf-the determinants and shareholder wealth effects of universal shelf takedowns". In the first essay, we document the prevalence of cash-rich seasoned equity issuers and investigate their issuing motives. Cash-rich seasoned equity issuers are not easily reconcilable with the traditional pecking order theory or recent empirical findings suggesting that urgent cash requirements drive seasoned equity offerings (SEOs). We examine the role of market timing, agency costs, precautionary motives, repatriation taxes, real options, and negative cash flows in driving cash-rich equity issuers. We find that cash-rich seasoned equity issuers are more overvalued, spend more SEO proceeds on future cash increases rather than investment, and have worse post-SEO operating and long-term stock price performance than non-cash-rich issuers, consistent with a market timing motive. However, we find that investors underreact to the market timing signal associated with cash-richness at the SEO announcement date. Our findings imply that investors should place a negative value on high ex ante cash holdings in their assessment of an SEO announcement. The second essay examines the role of ex ante excess cash holdings in corporate security choice. A multinomial logit model controlling for standard security choice determinants shows that cash-rich firms are more likely to issue seasoned equity over straight bonds than are non-cash-rich firms. Investors mistakenly perceive a precautionary motive for SEOs by cash-rich issuers at the announcement date, but analyses of post-offering uses of proceeds and stock returns suggest a market timing motive for their offerings. The multinomial model also indicates that cash-rich firms are more likely to issue convertible bonds over seasoned equity than are non-cash-rich firms. Cash-rich convertible bond issuers are R&D intensive, consistent with a precautionary demand for incremental cash. Our evidence implies that ex ante excess cash holdings are an important, previously overlooked determinant of corporate security choice. The final essay examines determinants and shareholder wealth effects of universal shelf takedowns. Using a manually-collected dataset, we obtain the novel findings that 46% of universal shelf registrations do not lead to shelf takedowns and seasoned equity offerings account for 77% of all takedowns. A multinomial logit model shows that asset growth, stock runup, excess cash holdings, income taxes, and historic takedown policy are important determinants of shelf takedowns. Event study analyses show that parts of stock market reactions to actual shelf takedowns take place at the shelf registration date. More particularly, investors react negatively (favorably) to the probability of equity (bond) takedowns. We also find that good corporate governance attenuates the negative impact of the equity takedown probability on stock market reactions. Together, our findings suggest that investors anticipate shelf takedowns at the shelf registration date and incorporate the predicted takedown probabilities in assessing shelf registrations and takedowns.

Date of Award	12 Dec 2022
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Norman Strong (Supervisor) & Marie Dutordoir (Supervisor)