As previously mentioned, an important effect on the observed negative announcement returns is the offer price discounts, reflecting the indirect cost of issuing equity. In Table 5, we present the mean and median offer price discounts for the different use of proceeds classifications as well as two-sample test-statistics to test for differences in means and medians between the sub-categories. However, in contrast to what we presented in the table of descriptive statistics, we here only include accelerated offers, or more commonly referred to as private placements. We focus on this flotation method as the offer price is typically disclosed in the initial announcement or shortly after. The results from Panel A illustrate, as we would expect, that
larger offer price discounts are associated with less favourable market reactions. Regardless of the stated intended use of proceeds, the mean offer price discount is 9.25% and significantly different from zero. For issuers stating specific Investment reasons, the mean offer price discount is 2.71%, statistically significant at conventional confidence levels. For Capex and
General firms, the offer price is on average 7.46% and 9.08% below the pre-announcement market price, respectively, both significant at 1% level. For issuers intending to use the issue proceeds for Refinancing purposes, the offer price discount is substantially larger relative to the other sub-categories, with a mean of 23.41%, significantly different from zero at 1% level. We further note that the median discounts are consistently smaller in magnitude, suggesting that some issuers suffer from substantially larger discounts relative to the typical issuer. However, the inference does not change when considering the medians. The results from Panel B are also generally consistent with the sign and magnitude of the means and medians in Panel A, whereof Capex and General are the only sub-categories that differ insignificantly from each other.
Table 5 – Mean and median offer price discounts in accelerated offers
Offer price discount – Accelerated Offers N Mean Median
Panel A: Offer price discount Investment Mean/Median 58 2.71% 1.53% Test-statistic ( 2.054)** [ 3.482]*** Capex Mean/Median 86 7.46% 4.25% Test-statistic (7.250)*** [7.671]*** General Mean/Median 157 9.08% 5.00% Test-statistic (8.607)*** [10.012]*** Refinancing Mean/Median 45 23.41% 13.74% Test-statistic (5.128)*** [4.557]*** All issuers Mean/Median 346 9.25% 4.48% Test-statistic (10.975)*** [13.757]***
Panel B: Two sample Welch adjusted t-test and Wilcoxon rank-sum test
Investment vs. Capex t = -2.8385*** z = -3.436*** Investment vs. General t = -3.7678*** z = -4.086*** Investment vs. Refinancing t = -4.3554*** z = -4.288*** Capex vs. General t = -1.0957 z = -0.847 Capex vs. Refinancing t = -3.4074*** z = -3.090*** General vs. Refinancing t = -3.0586*** z = -3.019***
Note: In Panel A, we present mean and median offer price discounts in the sample of accelerated offers split by the intended use of proceeds. In curve brackets, we report two-sided t-statistics, while we in square brackets report Wilcoxon sign test z- statistics. In Panel B, we report statistics from two-sample Welch-adjusted t-tests and two-sample Wilcoxon rank-sum tests. *, ** and *** denote statistical significance at the 10%, 5% and 1% level, respectively.
As the results in Table 5 suggest, accelerated offers may be considered controversial in the sense that only certain new and/or existing investors are targeted and offered shares at a substantial discount to the market price. Assuming no subsequent repair offering, this leads to a wealth transfer from existing shareholders to certain selected new and/or existing shareholders. If the issuer however chooses to conduct a subsequent repair offering, the non- targeted existing shareholders are likely to still suffer from value dilution, as these offerings tend to be relatively small. Mola and Loughran (2004) offer an underwriter power explanation of the observed large offer price discounts, of which increasingly influences from the investment banks lead to higher offer price discounts as more money is left on the table for their clients rather than the issuing firm. They find that both influence from the underwriters and offer price discounts have increased over time, consistent with their argument. Another explanation for the issuance of largely discounted shares in accelerated offers may be that the issuer directly compensates the investor for the rapid execution process, hence avoiding costs of due diligence and quality inspection (Eckbo, 2007). Moreover, the issuer may seek to attract certain investors to benefit from increased monitoring services and expert advice in the long- run. Additionally, the discount may be used as compensation to “friendly” investors for allowing management to maintain private benefits of control. We also suggest a related explanation, of which targeted investors may demand a discount to further increase its already
“optimal” exposure towards the firm. This is consistent with the findings of Wang and Hu (2014), who find that the proportion of new shares subscribed by larger existing shareholders in private placements is positively associated with the price discount. The expected benefits of targeting the specific investors should thus overcome the costs of issuing discounted equity. Overall, we find evidence in line with our expectations that issuers revealing specific
Investment plans on average do not experience any abnormal price reaction to the announcement of the equity offering. We also find that these issuers on average bear an indirect cost through the issuance of discounted equity, but considerably lower than for the other sub-categories. This suggests that the market considers the issue proceeds to be used to fund positive NPV projects that at least offset the observed offer price discounts. For more ambiguous issuers, Capex and General, we find evidence of relatively large discounts, whereof the market reaction upon announcement suffers accordingly. Particularly firms disclosing Refinancing motives are hurt extensively. A large proportion of these issuers are in financial distress, hence to ensure a successful placement of new shares, the offer price is often set well below the pre-announcement market price.