Long Run Underperformance of Seasoned Equity Offerings: Fact or an Illusion?

Transcription

1 Long Run Underperformance of Seasoned Equy Offerngs: Fac or an Illuson? 1 2 Allen D.E. and V. Souck 1 Edh Cowan Unversy, 2 Unversy of Wesern Ausrala, E-Mal: d.allen@ecu.edu.au Keywords: Seasoned Equy Issues, Performance Benchmarkng, Underperformance. EXTENDED ABSTRACT Ths paper uses Ausralan daa from 1984 o 1993 o show ha he long run underperformance of seasoned equy offerngs s relaed o he defnon of long-run. We demonsrae ha followng he perod delmed by oher wrers as he long run, ssung frms urn around n her performance and n fac ouperform her correspondng benchmarks, somemes more han makng up for he nal losses. We show ha he nal underperformance affecs he ssues of companes performng more han one SEO n a smlar fashon. Our resuls demonsrae ha a poor performance followng an SEO has, o an exen, a specfc role as he mgaor of coss assocaed wh he ssue. Are new equy ssues really a good nvesmen, or s more rewardng o nves n alernave asses? The enhusasm among nvesors for nal publc offerngs (IPOs) and many seasoned equy offerngs (SEOs) has been well documened. Bu do hese nvesmens provde a good reurn opporuny beyond he nal gan? In oher words, are hey a good long-erm nvesmen? Ths s he queson we wll aemp o address n some deal nsde hs paper. Alhough he underperformance of nal publc offerngs has been suded vgorously for a number of decades, he fndng ha seasoned equy offerngs are also poor long-run nvesmens s relavely new. Early wrngs can be raced o 1960s n he researches by Sgler (1964) and Frend and Longsree (1967), bu was no unl md 1980s ha he ssue of seasoned equy offerngs was serously revsed n sudes by Masuls and Korwar (1986) and Asquh and Mullns (1986) boh documenng a sgnfcan share underperformance of companes who have jus conduced a new equy ssue. Masuls and Korwar (1986) n fac observed hghly negave reurns for 50% of ndusral and 32% of publc uly socks n he same me, when he marke recorded a sgnfcanly posve reurn. Ths was conssen wh fndngs by Mkkleson and Parch (1986) and Schpper and Smh (1986). However, none of hese researchers provded a comprehensve heorecal explanaon for her resuls. The landmark sudy no he performance of ssung companes was conduced n 1995 by Loughran and Rer (1995) buldng on foundaons lad by Healy and Palepu (1990), Rer (1991) and Loughran, Rer and Rydqvs (1994) no IPOs. They affrmed he orgnal fndngs by Masuls and Korwar (1986) observng a 15.7% and 33.4% fveyear holdng perod reurns for IPOs and SEOs durng me when he reurns on non-ssung frms mached wh he ssuers by capalsaon were 66.4% and 92.8%, respecvely. Ths fndng was also suppored by ohers ncludng Spess and Affleck-Graves (1995) who observed he medan reurn for SEO frms o be only 10%, compared wh a 42.3% medan reurn for non-ssuers mached by sze. Loughran and Rer (1995) exended hs by reporng ha no sgnfcan underperformance was found n he frs 6 monhs followng an ssue, bu a crcal perod of 18 monhs ensued durng whch much of he dscrepancy occurred. Loughran and Rer (1997) who also noed no sgnfcan dfferenal durng year sx and seven. Our resuls, he frs, o examne Ausralan longrun SEO performance, show ha underperformance of Ausralan seasoned equy ssues s dependen on he defnon of he long run. (Allen and Parck (1996) examned long-run IPO performance).when long run s defned as welve years nsead of he usual fve years, SEOs can be clearly seen o urn around her performance parcularly durng years sx and seven. A seres of regresson resuls pon o a number of facors ha bear nfluence on he exen of he nal underperformance. Decreased ex-ane uncerany assocaed wh older frms causes a negave relaonshp beween he age and he exen of underprcng. Moreover, he greaer s he SEO cos specfcally assocaed wh underprcng of he new equy, he greaer wll be he underperformance ha follows he ssue. 559

2 1. INTRODUCTION The long-erm under-performance of SEOs has been observed n boh sockholder reurns and also as refleced sgnfcanly n lower operang performance. Loughran and Rer (1997), observed a 23% and 40% drop n operang ncome-o-asses and marke-o-book raos, respecvely, and a prof margn whch less han halved over he four-year perod followng an ssue. Spess and Affleck-Graves (1995), n addon, conrolled for dfferences n radngsysem, offer sze and frm age. McLaughln, Safeddne and Vasudevan (1996) re-examned he ssue concenrang on cash flows (found o declne by over 20%) and deeced a greaer overall performance drop n companes havng larger amouns of free cash. Loughran and Rer (1997) sugges ha when a frm s subsanally overvalued s lkely o ssue equy, augmenng wha Myers and Majluf (1984) refers o as fnancal slack. Ths s conssen wh he peckng order hypohess, whch suggess ha durng he wndows of opporuny he preference rankng can change o exernal equy, exernal deb and hen nernal equy, causng preference for SEOs raher han deb. Poor subsequen performance s fuelled by over-opmsm on he par of he ssung frms managers, see Healy and Palepu (1990), and Brous (1992). We repor sgnfcan underperformance of Ausralan frms ssung seasoned equy durng he frs fve years followng he offer, conssen wh pror sudes ncludng Loughran and Rer (1995, 1997) and Spess and Affleck-Graves (1995). Our resuls demonsrae ha alhough ssuers do under-perform non-ssuers n he nal years, hs rend s laer sgnfcanly reversed and by he sxh year ssuers acually repor sgnfcan over-performance. The over-performance hen gradually subsdes and by he egh year he cumulave performance of ssuers and nonssuers becomes approxmaely equal. The resuls sugges ha he exen of underperformance, especally over a fve-year perod, s relaed o he nal underprcng, as refleced n he Dluon Yeld measure of nal reurns. A dscusson of he research mehod and hypoheses esed follows n secon 2. Secon 3 dscusses performance measuremen, secon 4 presens he resuls and secon 5 provdes a bref concluson. 2. RESEARCH METHOD In hs paper we re-examne he long-run performance of Ausralan SEOs. We begn by reexamnng wheher he ssuers n our sample acually do under-perform wh respec o a number of benchmarks ncludng boh non-ssuers and proxes for he marke. We examne a number of hypoheses: 1a: Frms ssung seasoned equy do no underperform wh respec o correspondng non-ssuers. 1b: Frms ssung seasoned equy do no underperform wh respec o he marke We conjecure ha he observed long-run underperformance s a phenomenon condoned by he adoped defnon of he long run. We hypohesse ha akes more han fve years for capal projecs o come o fruon, afer whch he ssuers wll sgnfcanly ouperform non-ssuers. Some prelmnary suppor comes from Loughran and Rer (1997) who found ha crcal underperformance occurs n sevenh o wenyfourh monh followng an SEO, afer whch he performance gap sgnfcanly narrows. McLaughln, Safeddne and Vasudevan (1996) n fac deeced no sgnfcan dfference n he sxh year followng an ssue. Our second se of hypoheses are: 2a: SEO frms do no crossover from perod of underperformance o perod of over-performance relave o non-ssuers. 2b: SEO frms do no under-perform nonssuers, n aggregae, over he real long-run. Nex we examne he performance of companes whch had more han one seasoned equy offerng. We hypohesse ha f underperformance s a consequence of ssue, hen should accompany each offerng. Moreover, conrollng for changes n company characerscs ha resuled from he prevous ssue, each underperformance should be qualavely equal and quanavely smlar o he prevous one: Hypohess 3: Performance characerscs of frms havng more han one ssue of seasoned equy are no economcally and sascally smlar for each offerng. We hen analyse he mpac ha varous exraneous facors have on SEO performance presumng ha some of hese facors may dfferenae ssuers from non-ssuers. In parcular we wll conrol for: Frm Age A more esablshed frm generally suggess greaer sably of s coss and revenues, and hence lesser ex-ane uncerany. Company Bea As a proxy for company rsk, he hgher he bea he greaer would be he expeced reurn as a compensaon for he rsk, and hence he smaller should be he pos-ssue underperformance. Hence a posve relaonshp s ancpaed. 560

3 Marke Capalsaon Jus lke age, sze may also reflec on he ex-ane uncerany mplyng a posve relaonshp beween frm s capalsaon and he abnormal reurns. Year of ssue Ths facor s ncluded o accoun for he possbly ha dfferences n he economc envronmen surroundng he ssue play a role n he amoun of underprcng. Volume of SEOs n he ssue year Whle year of ssue s aken more as a raw reflecon on he condons affecng he offerng, volume of SEOs proxes specfcally for a parcular aspec of hese condons he level of marke opmsm. These argumens are esed n he followng null hypoheses: 4a:The exen of SEO underperformance s no a funcon of age. 4b:The exen of SEO underperformance s no a funcon of bea. 4c:The exen of SEO underperformance s no a funcon of marke capalsaon. 4d: The exen of SEO underperformance s no a funcon of he chronologcal arbue of he ssue. 4e: The exen of SEO underperformance s no a funcon of volume of seasoned equy offerngs n he year of ssue. We mgh expec he above varables o proxy for rsk or nformaonal uncerany whch could mpac on performance. The raw sample consss of 137 seasoned equy offerngs made n Ausrala beween January 1984 and Ocober The perod was chosen so as o perm a leas fve years of prce daa for each SEO company n he sample (leadng up o 1998). The SEOs me he followng crera: (1) he company s lsed on he Ausralan Sock Exchange and recorded n he DaaSream Daabase a he me of he ssue, (2) he offer mus be a cash offer for common sock, (3) he book value of asses a he end of he fscal year of ssung mus be a leas $5 mllon n erms of he 1990 purchasng power and (4) he company underakng he SEO s no a fnancal company or a regulaed uly. Furhermore, durng he sages of our sudy we examne no more han fve years of ssuers performance we remove all ssues by he same company made whn fve years afer he SEO o avod a perod overlap bas. Thus, when a company made a seasoned equy ssue, ha company canno re-ener he sample unl fve years afer he offer dae. Ths causes he deleon of 35 SEOs from he sample, leavng a oal of 102 ssues made by 94 companes. Fnally, for he analyss of he long run performance was necessary o exend he me frame back o Ocober 1986 nsead of Ths reduced he sample o 26 SEOs. Durng hs perod 5 of he companes had mulple ssues, so furher deleons produced a clean sample of 21 frms. I s also mporan o noe ha alhough each of hese companes dd have connuous daa for he ensung 12 year perod, hs was no a precondon n he selecon process, and as such survvorshp bas has no been nroduced. Choce of Performance Benchmarks We chose hree alernave benchmarks: (1) a szemached sample of non-ssung frms, (2) an ndusry-and-sze-mached sample of non-ssung frms and (3) a marke ndex benchmark Fnally, he marke ndex benchmark was esablshed by parng he performance of each ssuer wh he performance of he All Ordnares Index over he correspondng me. Inal (or openng) reurn s calculaed over he frs radng day on whch he seasoned equy was ssued. Pos-ssue reurns are compued durng he perod followng he offer dae, e excludng he frs day. Three separae me frames are defned: 1. Shor erm Defned as 3 years followng he offer dae. Ths perod s seleced o perm examnaon of he crcal underperformance perod, proposed by Loughran and Rer (1997) o occur 2. Medum erm Defned as 5 years followng he offer dae. 3. Long erm Defned as 12 years followng he offer dae. 3. PERFORMANCE MEASUREMENT We use Cumulave Abnormal Reurns (CAR) mehod o measure he performance of frms ssung seasoned equy. Raw daly reurns for ssuers and non-ssuers are frs calculaed as: PISS, PBM, r ISS, = 1 rbm, = 1 P P ISS, 1 r AOI AOI, = AOI 1 BM, 1 P ISS, = closng prce of he SEO frm on day (dvdends are ncluded approprae) P BM, = closng prce of he benchmark non-ssung frm on day AOI = closng value of he All Ordnares Index on day The abnormal reurn s hen calculaed as he raw reurn from he ssung frm mnus he reurn on he 1 561

4 correspondng non-ssuer or he All Ordnares Index. Hence ar,, = riss, rbm ar, = riss, raoi, r ISS, = Raw reurn for SEO on day r BM, = Raw reurn for non-ssuer benchmark frm on day r AOI, = Raw reurn for All Ordnares Index on day Nex, he average abnormal reurn for he day across all SEOs s calculaed as he equally weghed arhmec average of he ndvdual abnormal reurns: 1 AR = n ar, n = 1 n = number of SEOs n he sample Fnally, he CAR from he frs day afer he offerng unl day s calculaed as he sum of he daly average abnormal reurns unl. Hence CAR = AR d d = 1 To es for he sgnfcance of he resulng cumulave abnormal reurn we use a modfed - sasc ha also accouns for he auo-covarance ha may exs n he me seres: ( CAR ) = CAR var+ 2 ( 1) cov var = average cross-seconal varance over he measuremen perod cov = frs-order auocovarance of he AR seres We follow Conrad and Kaul (1993) and defne holdng-perod reurn as an alernave reurns measure: b HPR, a: b = ( 1 + R, ) 1 = a R, = Raw reurn of frm on day a = Begnnng of he holdng perod n b = End of he holdng perod The above formula wll be used o measure he oal reurns from a buy and hold sraegy n whch a sock s purchased a he frs closng marke prce afer lsng (a=1) and held for he subsequen shor-erm (b=3 252=756), medum erm (b=5 252=1260) and long erm (b=12 252=3024) perod. In he cross-seconal analyss we regress he reurns of SEOs (dependen varable) on a number of conrollng facors (ndependen varables): CAR = α + β Ω + ε (unvarae) CAR + β Ω n, n, = α + β Ω 1, 1, 2, 2, + ε (mulvarae) + β Ω +... CAR = Cumulave abnormal reurn of SEO for a fve year perod Ω = Conrol varable whose effec on SEO performance s beng measured α, β = Regresson coeffcens ε = Regresson error erms. Age (2 VARIABLES) INAGE Number of years from he me of SEO frm s ncorporaon n Ausrala. Ths varable wll look a he mpac of ssung frm s maury (as proxed by s effecve lfe) on he exen of underperformance. PUBAGE Number of years from he me of SEO frm s lsng on an organsed sock exchange n Ausrala. Through hs varable we examne he mpac of me durng whch he SEO s n he publc eye, on he pos-ssue performance.. Company Bea (1 VARIABLE) BETA Ths varable wll be used o es he adequacy of our benchmark n conrollng for he effec of frm s rsk as measured by he varably of s reurns relave o he marke.. Marke Capalzaon (1 VARIABLE) EQUITY Ths varable proxes for he frm sze and s calculaed as he marke value of he frm expressed n 1990 dollars: EQUITY = ln( MV ) v. Year of Issue (1 VARIABLE) ISSYR The year n whch each ssue s made. Volume of SEOs n he ssue year (2 VARIABLES) To accoun for he possbly of eher he overall clmae, or he clmae specfc o sample frms mpacng on her pos-ssue performance, we have used wo varables for hs facor: TOTVOL Measure of he effec of oal annual volume of SEOs on he ssung frm s performance. Calculaed as TOTVOL = ln( 1 + Ψ ) TOT SAMPVOL Measure of he effec of sample annual volume of SEOs on he ssung frm s performance. Calculaed as SAMPVOL = ln( 1 + Ψ ) SAMP The fnal elemen s o nvesgae he mpac of nal underprcng on he subsequen performance adj 562

5 of he ssuer. The nal underprcng wll be defned as R = R R, wh raw reurn AOI (R ) esmaed usng four mehods: CORERT I calculaes how deeply was each new share n he offer dscouned wh respec o he closng prce on he day of he ssue. P0 CORERT = 1 IP P 0 = Closng prce on he day of he ssue (=0) IP = Subscrpon prce for each new share n he SEO ABSRT Compares he closng prce a he offer dae wh he closng prce on he day jus pror o he ssue, hus ncorporang everyhng from he effec of equy addon o he reacon by he marke. P0 ABSRT = 1 P 1 DILRT Smlar o CORERT, bu also akes no accoun he proporon of new equy ssued wh respec o he equy n place pror o he offer hus reflecng on he dluon effec of new shares. ( η + 1 ) P DILRT = 0 1 η Po + IP η = Rao a whch new equy s ssued. TOTRT A holdng perod reurn for an nvesor who acqures he necessary number of shares (η) on he las day before he SEO, exercses he rgh o buy he exra equy, and sells a he close of he day of he ssue. ( η + 1) P0 TOTRT = 1 η P 1 + IP As before, each of he marke-adjused defnons of he nal reurns wll be regressed on he hree year and fve year CARs of he ssuers. For all analyses, -sasc and p-value wll be used o assess he sgnfcance of regresson resuls. 4. RESULTS Table 1 and Fgure 1 show he long-run performance of SEOs. The sze-mach-adjused reurns produce CARs of % sgnfcan a a 5% level a he end of he hrd year. When we exend he vew o he medum erm, he underperformance of he SEOs largely subsdes resulng n a CAR of jus % a he end of he ffh year. When we ake ndusry-and-sze mached non-ssuers as he benchmark, he underperformance of he ssuers becomes more marked. The CAR s sgnfcanly negave for each of he fve pos-ssue years reachng %, whch s sgnfcan a a 1% level. Smlar o he sze-mach-adjused reurns, underperformance s no evden durng years four and fve and he CAR reaches % sgnfcan a a 5% level by he end of medum erm. In sum, herefore, resuls rejec Hypohess 1a frms ssung seasoned equy do under-perform wh respec o correspondng non-ssuers. A welve-year SEO performance wndow s observed o esablsh wheher he above underperformance s a perssen phenomenon. Our resuls summarzed n Table 2 and Fgure 2 are que remarkable, despe he expeced drop-off n sgnfcance levels due o he smaller number of SEOs n he sample. The CAR s sgnfcanly negave n boh cases durng he frs year, peakng n year hree a % sgnfcan a a 5% level, whch s conssen wh % for he shor-erm sample, also sgnfcan a a 5% level. Underperformance hen subsdes n boh cases durng fourh and ffh year followng he ssue. Srkngly, however, he performance connues o mprove furher durng years sx and seven. The CAR crosses no posve errory n he frs quarer of year 6 recordng a sgnfcanly posve 15.29% by he end of he year. I hen proceeds o peak a +28.9% n he mddle of he sevenh year before sarng s declne, reachng zero once agan n he las quarer of year egh. The resuls from a regresson of he hree year cumulave abnormal reurns on he seven conrol varables (no repored and avalable on reques from he auhors), concur wh our predcons. The company age facors, INAGE and PUBAGE are boh posve mplyng a negave relaonshp beween a frm s maury and he exen of he underprcng. Whls he me snce lsng (PUBAGE) does no seem o play a major role n he abnormal reurns, he amoun of me snce a company s ncorporaon (INAGE) s sascally sgnfcan for all benchmarks. In sum he resuls rejec Hypoheses 4a and 4b he exen of underperformance s a funcon of age, when age s 563

6 expressed as he amoun of me snce ncorporaon and s relaed o company bea. We canno rejec Hypoheses 4c and 4d, fndng he exen of underperformance o be neher a funcon of marke capalsaon nor he chronologcal year of ssue. The resuls do, however, rejec Hypohess 4e suggesng ha he exen of underperformance s relaed o he volume of SEOs ssued n he correspondng year, bu only when marke performance s used as a benchmark. Hypohess 4e s no rejeced for oher benchmarks. 5. CONCLUSION. Our resuls show ha he general conclusons of many wrers accusng frms ssung seasoned equy of long run underperformance s dependen on he defnon of he long run. When long run s defned as welve years nsead of he usual fve years, SEOs can be clearly seen o urn around her performance parcularly durng years sx and seven. A seres of regresson resuls pon o a number of facors ha bear nfluence on he exen of he nal underperformance. Decreased ex-ane uncerany assocaed wh older frms causes a negave relaonshp beween he age and he exen of underprcng. Moreover, he greaer s he SEO cos specfcally assocaed wh underprcng of he new equy, he greaer wll be he underperformance ha follows he ssue. Fnally, he greaer s he rsk of he ssuer as proxed by s bea, he more compensaon wll nvesors requre for akng on new shares, and hence he smaller wll be he subsequen loss of performance. 7. REFERENCES Allen D.E. and Parck M., 1996, Some Furher Ausralan Evdence on he Long-Run Performance of Inal Publc Offerngs: , Pacfc Basn Fnancal Markes 2A, Asquh P. and Mullns D., 1986, Equy Issues and Offerng Dluon, Journal of Fnancal Economcs, Vol 15, Brous P.A., 1992, Common Sock Offerngs and Earnngs Expecaons: A es of he Release of Unfavourable Informaon, Journal of Fnance, Vol 47, 4, Conrad, J. and G. Kaul, 1993, Long-Term Marke Overreacon or Bases n Compued Reurns?, Journal of Fnance, 48, Frend I. and Longsree J.R., 1967, Prce Experence and Reurn on new sock ssues, Invesmen Bankng and he New Issues Marke, World Publshng Co., Cleveland. Healy P.M. and Palepu K.G., 1990, Earnngs and Rsk Changes Surroundng Prmary Sock Offers, Journal of Accounng Research, Vol 28, 1, Loughran T., Rer J.R. and Rydqvs K., 1994, Inal Publc Offerngs: Inernaonal Insghs, Pacfc-Basn Fnance Journal, Vol 2, Loughran T. and Rer J.R., 1995, The New Issues Puzzle, Vol 50, 1, Journal of Fnance, Loughran T. and Rer J.R., 1997, The Operang Performance of Frms conducng Seasoned Equy Offerngs, Vol 52, 5, Journal of Fnance, December: Masuls R. and Korwar A., 1986, Seasoned Equy Offerngs: An emprcal nvesgaon, Journal of Fnancal Economcs, Vol 15, 1, McLaughln R., Safeddne A. and Vasudevan G.K., 1996, The Operang Performance of Seasoned Equy Issuers: Free Cash Flow and Pos-Issue Performance, Fnancal Managemen, Vol 29, Mkkleson W. and Parch M., 1986, Valuaon Effecs of Secury Offerngs and he Issuance process, Journal of Fnancal Economcs, Vol 15, Myers S. and Majluf N., 1984, Corporae Fnancng and Invesmen Decsons When Frms Have Informaon ha Invesors Do No Have, Journal of Fnancal Economcs, Vol 13, Rer J.R., 1984, The Ho Issue Marke of 1980, Journal of Busness, Vol 57, 2, Rer J.R., 1991, The long-run performance of nal publc offerngs, Journal of Fnance, Vol 46, 1, 3-27 Schpper K. and Smh A., 1986, Comparson of Equy Caveas and Seasoned Equy Offerngs: Share Prce Effecs and Corporae Resrucurng, Journal of Fnancal Economcs, Vol 15, Spess D.K. and Affleck-Graves J., 1995, Underperformance n long-run sock reurns followng seasoned equy offerngs, Journal of Fnancal Economcs, Vol 38, Sgler G., 1964, Publc regulaon of secury marke, Journal of Busness,

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