Block Buying and Choice of Issue Method in UK Seasoned Equity Offers

Abstract

Much of the new equity declined by existing shareholders in UK SEOs is bought in a few large blocks, both by other existing holders and by new investors. The paper argues that a placing process via negotiation with investors facilitates the purchase of large blocks better than the alternative method of selling rights on the market, and that this helps to explain the decline of rights issues in the UK. Other explanations for use of the placing method appear to be of limited relevance, except perhaps certificaton of issuer value.

Seasoned Equity Offerings: Stock Market Liquidity and the Rights Offer Paradox

“…Korteweg and Renneboog (2002) find that UK issuers with less liquid shares are more likely to choose an open offer, due to potentially depressed rights prices. Armitage (2007) finds that the cost of selling blocks of rights is substantial in the case of less liquid shares and represents a hidden cost of the rights issue method.…”

“…In the UK, Barnes and Walker (2006) do not find support for liquidity being a strong driver of issue method choice. Armitage (2007) argues that there are substantial transaction costs in rights offerings for blockholders who do not wish to subscribe to new shares. Further, Armitage (2010) documents that it is mainly the largest UK firms that still use rights issues, because rights issues require a liquid market for the issuer's shares and rights, in order to keep transaction costs low.…”

“…For firms fearing tender offers and hostile entry in their capital, it may be optimal to use standby rights. For the period 2003–06, Armitage () documents that pure rights issues in the U.K. are also much larger than the other types of offer, because they are carried out by larger companies. For the period 1996–2007, Capstaff and Fletcher () find that rights offers and placings are comparable in size.…”

Rights Offerings and Expropriation by Controlling Shareholders

“…Armitage () finds that lots of the new shares not subscribed by existing shareholders in UK open offers are bought in a few large blocks, both by other existing holders and by new investors.…”

Net equity issuance effect in the UK

“…A possible explanation for the different UK result for large companies lies in their choices of SEO method. Compared with open offers and placings, rights issues tend to be chosen by larger companies in the UK, and to be larger in relation to the market capitalisation of the company (Barnes and Walker, 2006;Armitage, 2010). A higher proportion of the new shares is sold to existing shareholders in a 11 There is no previous UK evidence on ARs for net-repurchase portfolios.…”