Equity Issues and Offering Dilution
Asquith and Mullins
JFE 1986: can be found here: http://schwert.simon.rochester.edu/f423/jfe86_am.pdf
This is largely an event study paper that looks at 531 offerings (both primary as well as secondary offerings) from 1963-1981. As predicted by many models (agency cost, pecking order, and information asymmetry) the offerings were met with negative reactions. [Note: primary transactions affect capital structure where secondary offerings would not.] Overall 2 day reaction was -2.7% (-3% for primary issues, -2% for secondary issues.)
This negative reaction was not as pronounced in utility stocks which suggests less informational asymmetry due to the regulations that were in place during this time period.
The paper also looks at dilution (defined as the ratio of the change in equity value to the proceeds of the issue. For primary offering the average dilution is -31% (median 28%). For secondary offerings the average dilution was -77.6% (median 43.4%). (In English the firms loses 31% of the new money they raised which may explain why firms are so hesitant to sell equity.)
More than 80% of the issues caused decreases in value of existing stock and more than 6% of the issues caused dilution of over 100%. That is the firm is worth less AFTER issuing more equity.
- Further the larger the issue the larger the price drop.
- Both secondary and primary issuers sell after the stock has done well relative to the market.
- Regressions looking at capital structure explanations were insignificant.