Net equity issuance effect in the UK

Abstract

Net equity issuance (NEI) by firms has predictive power for US stock returns. This paper examines the NEI anomaly for UK stocks, using regression on firm characteristics and sorted portfolios with several factor models. The anomaly generalises to the UK only in part. We confirm the existence of a large NEI effect for small and midsize stocks, but not for large stocks. The repurchase effect, of positive abnormal returns following repurchases, is absent in the UK. We also find that the NEI effect in smaller stocks is not exploitable by investors, allowing for transaction costs.

Equity issuance and share price performance on the Johannesburg Stock Exchange

“…Companies are often reluctant to implement a rights issue to fund new internal investments (Houston et al, 1997). Amongst others effects, those firms generally experience a reduction in their stock price when announcing that they are selling stock, and experience abnormal returns in the short term when related to the share price from preceding years (Zhou et al, 2019). This was highlighted by Winn, Parente and Porter (2016) who concluded that companies and buyers tend to withhold information when transactions occur under conditions of stress.…”

“…Additionally, research conducted by Zhou et al (2019) indicates that the share equity effect is higher for small and midsize stocks, but comparatively low for large stocks.…”

“…Companies are often reluctant to implement a rights issue to fund new internal investments (Houston & Ryngaert, 1997). Amongst the other outcomes, those firms generally experience a reduction in their share price when announcing that they are implementing a rights issue, and experience negative abnormal returns in the short term (Zhou, Armitage, & Michou, 2019). Further to this, Daniel and Titman (2006) hypothesized that companies might issue equity based on intangible information that is not known to the public, as opposed to tangible accounting-based measures.…”

“…Very little research exists that investigates the effect of equity issuance on companies in South Africa. According to Zhou et al (2019), it is important to conduct such investigations that are country-dependent. Firstly, since most research is conducted on the American stock exchanges (NYSE, Nasdaq, BSE), generalisations between them and the Johannesburg Stock Exchange (JSE) may occur.…”

“…Firstly, since most research is conducted on the American stock exchanges (NYSE, Nasdaq, BSE), generalisations between them and the Johannesburg Stock Exchange (JSE) may occur. Secondly, asset pricing tests are sensitive to different methodsthe support for a given factor or anomaly variable depends on other factors that are included in their analysis model (Zhou et al, 2019). Furthermore, the effect of a rights issue is industry and companydependent.…”