Differential shareholder wealth and volume effects surrounding private equity placements in New Zealand
Hamish D.Anderson a,⁎,Lawrence C.Ro b ,Steven F.Cahan c a Department of Finance Banking and Property,Masy University,Private Bag 11222,Palmerston North,New Zealand
b Department of Commerce,Masy University,New Zealand
c Department of Accounting an
d Finance,University of Auckland Business School,New Zealand
Received 27August 2004;accepted 13January 2006
Available online 18May 2006
Abstract
Private equity placements in New Zealand exhibit a strong positive relationship between abnormal announcement returns and the price at which shares are placed.The relationship suggests that placem
ent price conveys important information regarding firm quality and value.This is significant as the New Zealand market has different regulations governing private equity placements compared to other countries.For example,private placement purchars in New Zealand can buy shares at substantial discounts and immediately ll on-market without disclosing the trades to the market for a period of at least 5days.Private placements issued at a premium exhibit a permanent positive impact on firm value.In contrast,tho placed at a discount experience negative announcement returns and show a significant run-down in returns following the announcement.Private placements spark a large increa in trading activity in the 5days following an announcement and the increa is particularly strong for tho placed at a discount.We also find that companies that privately place equity in New Zealand are typically low book to market,thinly traded stocks.Therefore,the immediate returns available to purchars of discounted shares may reflect fair compensation for the risks.
经期时间长怎么回事
©2006Published by Elvier B.V .
JEL classification:G14;G35;G38
Keywords:Seasoned equity;Private
placements
Pacific-Basin Finance Journal 14(2006)367–
/locate/pacfin
纯奶⁎Corresponding author.
E-mail address:H.D.Anderson@ (H.D.Anderson).
0927-538X/$-e front matter ©2006Published by Elvier B.V .
doi:10.1016/j.pacfin.2006.01.003
368H.D.Anderson et al./Pacific-Basin Finance Journal14(2006)367–394
1.Introduction
This paper investigates the stock price reaction and trading activity surrounding private placement announcements in New Zealand's small capital market tting.Due to regulatory differences,the announcement reaction to New Zealand private placements is likely to be different to that documented in the United States and the small capital market of Singapore.As New Zealand's private placements are predominantly issued at a discount,in contrast to Singapore,we are able to extend Tan et al.(2002)multivariate analys to a sample of discounted private placements.We find there are differences for New Zealand's announcement reaction and explanatory variables.
This result may not be surprising due to a number of regulatory differences.First,in New Zealand,there are no on-market resale restrictions.Second,there is no restriction on discount size. Third,the substantial shareholder trade disclosure requirements in New Zealand enable private place
ment purchars to trade for a period of time without disclosing this to the market.This deprives outside investors of receiving valuable information in a timely manner regarding the purchars'perception of firm quality and its long-run prospects.
Typically,New Zealand firms issue asoned equity through the two mechanisms of rights issues and private placements.While Marsden(2000)investigated New Zealand rights issues,no study to date has examined private placements in New Zealand.Studies involving US firms reveal a marked asymmetry between the share price reactions for private and public asoned equity offerings.US studies consistently reveal significant negative abnormal returns for public offerings by way of firm commitment underwritten offers and renounceable rights issues.In contrast,a positive announcement reaction is evident for private placement announcements in the US(for a summary of the literature,e Eckbo and Masulis,1995).While rights issues are not a common mechanism for issuing asoned equity in the US,it is still a dominant form of raising asoned equity in many other countries.1However,the evidence concerning the announcement effects of rights offerings for non-US firms is somewhat mixed.2
In comparison to the plethora of studies into public offerings of asoned equity,relatively little rearch has focud on private placements.The initial US announcement effects study by Wruck(19
89)reveals a significant positive reaction of around4.5%for99private placements of NYSE and AMEX listed firms.Examining relatively smaller firms listed on the NASDAQ, Hertzel and Smith(1993)report a positive1.72%market reaction for106private placements over the1980to1987period.
Similar to rights issues,the announcement effect of private placements outside of the US varies across countries.In examining76private placements by Japane firms,Kato and Schallheim (1993)report very similar results to Wruck(1989)with abnormal announcement returns of clo to5%.However,Tan et al.(2002)examine67private placements of Singapore Exchange-listed firms over the1988to1996period and find significant positive returns during the21days prior to the announcement but insignificant announcement day returns.In contrast,Chen et al.(2002)also examine the Singapore stock market from1988to1993but report an average negative return of −0.89%for their sample of53private placement announcements.
1For example,Singapore(Tan et al.,2002),Korea(Dhatt et al.,1996;Kang,1990),Norway,(Bohren et al.,1997), Greece(Tsangarakis,1986),UK(Marsh,1979)and Switzerland(Loderer and Zimmermann,1988).
2For example,Tan et al.(2002)find positive returns in Singapore,while Loderer and Zimmermann(198
8)find insignificant returns in Switzerland to rights issue announcements.In contrast,negative abnormal returns are experienced in Australia(Hou and Meyer,2002)and New Zealand(Marsden,2000).
Several theories have been put forth to explain the announcement effect for asoned equity issues.The information-signalling hypothesis is one of the dominant explanations for obrved negative price reaction to public equity announcements in the US.Miller and Rock (1985)theori that unexpected external financing requirements (whether equity or debt 3)signal lower current and future cash flows.Further,Myers and Majluf (1984)develop a model that attributes the decline in market prices upon the announcement of SEO to information asymmetry and the resulting adver lection risk premium charged by purchars of the equity issue.
Alternative explanations include the price pressure hypothesis ,which states that,while long-run demand curves for curities may be perfectly elastic,in the short-run,they may be less so (Scholes,1972).Therefore,a sudden increa in supply may have a temporary negative effect on share price.The firm quality argument put forward by Heinkel and Schwartz (1986)argues that the renounceable rights issue subscription price signals firm quality:the deeper the subscription price discount,the more negative the signal.The same line of thought would apply to private placements w
here managers and the private placement purchars are assumed to have greater knowledge of the firm's future prospects.As such,placement price signals to the market their beliefs about the firm's future prospects.Bad on Myers and Majluf's (1984)information asymmetry model,Hertzel and Smith (1993)suggest that firms may u private placements to signal that the firm is undervalued.Also,changes in ownership concentration have also been put forward as a possible explanation for the market reaction to the announcement of a private placement.Wruck (1989)argues that firm value increas when the change in ownership concentration aligns management with shareholder interests.
We find that the price at which a private placement is sold conveys important information to New Zealand stock market participants regarding firm quality.We find an asymmetric price reaction to private placements issued at a premium and tho at a discount.Tho issued at a premium exhibit a permanent positive impact on firm value.In contrast,tho placed at a discount experience negative announcement returns and show a significant run-down in returns following the announcement.Thin trading also magnifies the price reaction for both the premium and discounted private placements.We also find a significantly higher increa in trading volume in the 5days subquent to private placements priced at a discount as compared to private placements priced at a premium.
The remainder of this paper is structured as follows.The next ction outlines New Zealand's regulatory environment relating to private placements.Section 3outlines the data ud and details the final sample characteristics.The announcement return and volume event study results are prented in Section 4.Explanatory cross-ctional analysis is prented in Section 5and Section 6concludes.
2.Private placements and New Zealand's regulatory environment
A private placement is a new stock issue to a small number of institutions or high wealth investors.The issuing firm is not required to prepare and distribute a prospectus and,as a mechanism for raising equity,it can be executed very quickly.However,as private placements are issued to a small number of investors,the existing non-participating shareholders will experience a dilution in their proportional ownership and therefore,to their claim of future cash flows.To ensure that non-participating shareholders'rights are protected,stock exchanges typically have 3Bondholders would view a negative outlook on current and future earnings negatively as the risk of default increas.369
H.D.Anderson et al./Pacific-Basin Finance Journal 14(2006)367–394
specific regulations governing the issue of private placements.Table 1compares key regulatory characteristics of private placements in New Zealand with the US and Singapore.
In New Zealand,the amount of equity raid through private placements historically has been restricted to 10%of a company's shares outstanding within a 12-month period as shareholder approval is required for larger equity issues (NZSE 4Listing Rules —Section 7.3.55).While a similar 10%restriction exists in Singapore,no size restriction is evident in the US though there are restrictions on private placement purchars on-lling curities in the stock market.On-market resale restrictions are not evident in New Zealand or Singapore.Of the three countries examined,only Singapore has a restriction on the size of the discount to the current market price 6for which a private placement can be sold.Due to Singapore's institutional tting,the discount size regulation is redundant for most of Singapore's private placements as they are typically issued at a premium (Tan et al.,2002).
While all three countries disallow directors acquiring a parcel of shares through a private placement,Singapore has a further restriction that private placements cannot be sold to existing substantial shareholders.7This restriction prevents large shareholders from pressuring management into lling to them at substantially discounted prices.
4
The New Zealand Stock Exchange (NZSE)was demutualid on January 1,2003and then rebranded itlf as the New Zealand Exchange (NZX)on May 30,2003.This paper refers to the New Zealand stock market using its old name of NZSE as that was the actual market name for the entire period covered in this paper.
育婴护理知识
5On October 29,2003,the NZSE changed Listing Rule 7.3.5by raising the maximum size restriction from 10%to 15%.
6The maximum discount is 10%of the last transacted price on the Singapore Stock Exchange either at the time or immediately preceding the signing of the private placement.
7The US has a similar restriction in that the shares cannot be sold to an existing blockholder.Table 1怎么折爱心
A country comparison of regulatory characteristics of private placements
Regulatory
characteristic
New Zealand United States Singapore Issue size Maximum 10%in a
12-month period without
shareholder approval
体能课教案
No restriction Maximum 10%in a 12-month period without shareholder approval Pricing No regulatory restriction
No regulatory restriction A maximum 10%discount to current market price Resale restriction No regulatory restriction On-market trades are
prohibited,however,
unregistered financial
claims may initially only be
traded among other high net
奶油樱桃
value investors.
No regulatory restriction Purchars Cannot be sold to directors or associated persons.Fewer than 35sophisticated
investors,including existing
substantial shareholders.Cannot be sold to directors or substantial shareholders
This table summaris the key regulatory characteristics of New Zealand private placements and outlines similar regulation in the United States and Singapore.
The information sources for each country are as follows:New Zealand,The New Zealand Stock Exchange Listing Rules,United States,Grinblatt and Titman (2002),Wruck (1989),and Singapore,Chen et al.(2002).
370H.D.Anderson et al./Pacific-Basin Finance Journal 14(2006)367–394
However,the size of the discount at which New Zealand management can issue new shares at is restrained the Companies Act 1993.Section 47(1)(c)of the Act details directors'duties in relation to issuing new shares.In particular,it states that “Before the board of a company issues shares …the board must resolve that,in its opinion the consideration for and terms of the issue are fair and reason
able to the company and all existing shareholders.”Also all directors voting in favour of the new share issue must sign a certificate stating as much [Section 47(2)(d)].
Announcements of asoned equity issues,including private placements,by NZSE listed companies must be made in the first instance to the NZSE as soon as the information becomes available [NZSE Listing Rules —Section 10.8.1(a)].It is then disminated to stockbrokers and media.The following information must be made in the initial announcement by a New Zealand firm issuing new curities,(a)class or type of curity,(b)number of curities issued,(c)issue or subscription price,(d)the reason or purpo of the issue,(e)any terms or conditions of the issue,(f)total number of curities of that class after completion of the issue and (g)the date of acquisition [NZSE Listing Rules —Section 7.12.1].The disclosure requirements provide timely information to the market which all investors can u in order to rebalance their portfolios accordingly.
For discounted placements,the opportunity aris for purchars to ll the new shares without informing the market on a continuous basis.Until December 2002,New Zealand had very different insider trading disclosure laws compared to other developed countries.This,coupled with weak enforcement of the regulations,provides a window of opportunity for insiders,including substantial shareholders,to make multiple transactions without the market knowing (Etebari et al.,2004).Under t
错语he Securities Market Act 1988,only substantial shareholders with over 5%shareholding were required to disclo any transaction that changed their shareholding by a cumulative 1%since the previous disclosure.Etebari et al.(2004)find evidence that abnormal returns are earned for sale transactions by insiders (which include substantial shareholders)in New Zealand companies.They argue that trading by insiders is a valuable source of information,but when disclosure is not continuous,there is little chance of inside information being incorporated into the share price in an efficient manner.
Private placement purchars who own more than 5%have a 5-day window to ll before they are required to disclo this information.While tho who hold less than 5%do not inform the market at all.8Information that a private placement purchar is a long-term investor in the firm may convey negative information regarding the purchar's perception of firm quality and its long-term prospects.However,this information is not disclod,or in the ca of substantial shareholders,not disclod in a timely manner.
In summary,veral unique characteristics exist in New Zealand's regulatory environment for private placements and disclosure requirements.First,unlike Singapore,there is no explicit restriction on discount size in the period studied in this paper.Second,unlike the US,there are no on-market resale
restrictions and,third,the time frame for reporting trades in New Zealand provides purchars with ample opportunity to ll without informing the market.The 8The disclosure laws that relate to trading by private placement purchars is effectively unchanged by the Securities Market Amendment Act 2002.The key feature of this Act was to require directors and executives to disclo all trades within the same 5-day window previously required of substantial shareholders.Previously,share trading by Directors and Executives who shareholding was less than 5%were only disclod in the Annual Financial Statements.Directors and Executives are not allowed to buy privately placed shares.371
H.D.Anderson et al./Pacific-Basin Finance Journal 14(2006)367–394
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