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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Pacific-Basin Finance Journal, Volume 16, Issue 3, June 2008, Pages 316–340
This study examines securities price reaction to announcements of rights issues by listed Indian firms during the period 1997–2005. We document a positive but statistically insignificant price reaction to such announcements. The price reaction is significantly more negative for firms with a family group affiliation compared to firms with no family group affiliation. The notable differential price reaction between firms with and without a family group affiliation can be explained by the “tunneling hypothesis.” For firms affiliated with a family group, we surmise that investors perceive that the proceeds of the rights issue may be misused for the benefit of the controlling shareholder. We also find that higher levels of individual shareholding in the firm are associated with a more positive price reaction to the announcement.
This study examines share price reaction to the announcement of rights issues in India. Rights issues are commonly used by firms in many countries to raise new capital. This is documented, among others, in Australia (Balachandran et al., 2007), China (Wang et al., 2006), Greece (Tsangarakis, 1996), Hong Kong (Ching et al., 2006), Korea (Dhatt et al., 1996), Malaysia (Salamudin et al., 1999), New Zealand (Marsden, 2000 and Anderson et al., 2006), Norway (Bφhren et al., 1997), Singapore (Tan et al., 2002), Turkey (Adaoglu, 2006) and UK (Slovin et al., 2000). In the United States, most industrial firms rely solely on firm-commitment underwritten offers or seasoned equity offerings (SEOs) to obtain new equity finance. For US firms, the share price reaction to both firm-commitment underwritten offers and rights offers has almost invariably been negative (see, for example, Mikkelson and Partch, 1986, Barclay and Litzenberger, 1988, Hansen, 1989 and Eckbo and Masulis, 1992). Several hypotheses have been advanced to explain the negative price reaction to new equity issues and the choice of flotation method for new equity in the US. This includes the signaling hypothesis of over-valuation of assets (Myers and Majluf, 1984), the tax advantage to debt (DeAngelo and Masulis, 1980), agency costs and wasteful investment (Jensen and Meckling, 1976 and Stulz, 1990) and the price pressure hypothesis (Corwin, 2003). More recent evidence by Kim and Purnanandam (2006) suggests US investors react negatively to firm-commitment offers when they perceive managers will misuse the issue proceeds and engage in value-destroying corporate acquisitions or negative NPV investments. However, when investor and manager interests are well-aligned, Kim and Purnanandam (2006) find the price reaction insignificant around the announcement period of the offer. US firms that raise equity through underwritten offers are typically large and share ownership is widely dispersed. For these firms, Eckbo and Masulis (1992) posit that the expected level of current shareholder take-up to any rights issue would be low and that a firm-commitment underwritten offer minimizes information asymmetry and adverse selection costs between the issuer and investors. Hansen (1989) argues that a firm-commitment offering enables underwriters to sell equity to new investors at the current market price and avoids the need to incur a price discount required to raise new equity under a rights issue. Kothare (1999) also presents evidence that rights issues in the US increase the bid-ask spread of the issuing firm's stock. These hypotheses and explanations of a negative price reaction to US equity issues do not, however, fully explain price reaction to the announcement of equity issues in other markets. For instance, Balachandran et al. (2007) report an insignificant price reaction, on average, to the announcement of a fully underwritten renounceable rights issue and a significantly negative price reaction for non-underwritten non-renounceable issues in an Australian setting. This contradicts Eckbo and Masulis (1992), who report significant negative price reactions for underwritten rights issues and insignificant price reactions for non-underwritten issues. Wang et al. (2006) reports a significant positive abnormal return of 4.8% on the ex-date for Chinese rights issues. They also document a significant and positive relationship between post-offering abnormal returns and changes in the operating performance of rights issuing firms. Empirical studies from Japan (Kang and Stulz, 1996), Norway (Bφhren et al., 1997), Switzerland (Loderer and Zimmermann, 1988) and Korea (Kang, 1990 and Dhatt et al., 1996) document an increase in shareholder wealth around the announcement of rights issues. In a similar vein, Tan et al. (2002) reports that firms that undertake larger rights issues have higher abnormal returns in Singapore. This evidence is not supportive of the wasteful investment or price pressure hypotheses that may partly explain the negative price reaction to US equity announcements. Tan et al. (2002) attributes a larger rights issue size to more favorable news about the earnings prospects of a firm and postulates that the issue provides a positive signal to investors of greater than anticipated new investment opportunities available to the firm. Similarly, Salamudin et al. (1999) reports a positive price reaction to a rights issue announcement in the Malaysian market when economic conditions are favorable. They attribute this finding to the signaling of profitable investment opportunities when growth prospects are strong in an emerging country. However for Hong Kong, Ching et al. (2006) reports negative abnormal returns to rights issue announcements. Many Hong Kong firms are dominated by insiders — individuals or family members that also take senior management positions in the firm. Insiders are observed to be net sellers of stock in the period six months before and six months after the rights issue announcement. Ching et al. (2006) attributes this evidence to insiders believing the firm's stock is overvalued by the market. In this light, we examine share price reaction to a rights issue announcement by Indian firms. Our study appears to be the first to examine share price reaction to Indian rights issues. India is an emerging capital market and the largest democracy in the world, with a legal and common law system based on English law.2 The Indian market has the potential to assume significant global economic importance. However, similar to many Asian and Latin American markets, the Indian market is dominated by family controlled business groups. Most of the firms are closely held either through direct ownership or through indirect ownership through group firms. These group firms constitute roughly 70% of Indian market capitalization and this puts India among the more highly concentrated markets by ownership in the world. Understanding the market reaction to the announcement of rights issue in the Indian market, with its unique institutional features, will broaden understanding of how investors react to the announcement of new equity issues. We find average price reaction to the announcement of a rights issue by Indian firms to be more negative for firms affiliated with family groups. As a rights issue increases the cash resources of the firm, this enables the controlling family shareholder to expropriate some of the firm's wealth to entities where the family group shareholder has greater comparative cash flow rights. This results in a net wealth gain to the controlling family shareholder at the expense of other shareholders.3Johnson et al. (2000) define the transfer of assets and profits out of firms for the benefit of their controlling shareholders as tunneling. They argue that controlling shareholders have incentives to expropriate the firm's wealth to increase their own wealth. Tunneling is common in many Asian markets with less developed systems of corporate governance compared to more developed markets (see, Bae et al., 2002; Bertrand et al., 2002). Investors are cognizant of these high agency costs and the potential for tunneling and the misuse of funds raised under the rights issue. Thus, on average the share price reacts negatively to the announcement. We also find that higher levels of individual shareholding are associated with a more positive price reaction to the rights announcement. High levels of individual shareholding may expose the firm to a greater likelihood of takeover or subject managers to greater discipline in the market for corporate control. For these firms, the interests of managers and shareholders may be more closely aligned and thus price reaction to the announcement of a rights issue is more positive. This finding is consistent with Asuncion-Mund (2007) who state that minority shareholders' interest in Indian firms must be increased for improved corporate governance. The rest of this paper is structured as follows. Section 2 outlines institutional aspects of the Indian stock market and rights issues in India. Section 3 develops our testable hypotheses. Section 4 discusses the data and methodology employed in this paper. Section 5 examines the price reaction to the announcement of our sample of Indian rights issues. Section 6 presents the empirical results of the hypotheses developed to explain the differential price reaction to the rights issue announcement. Section 7 concludes the paper.
نتیجه گیری انگلیسی
This paper examines security price reaction to the announcement of rights issues by Indian firms. India is a large economy and a major emerging capital market. Our study adds to the literature on the effects on shareholder wealth of new equity announcements in an emerging market with unique institutional and regulatory features compared to more developed markets. Unlike many other emerging markets, India is the world's largest democracy and has a legal and common law system based on English law. Despite this there is still much concern in the Indian market about poor corporate governance, weak investor protections, and lack of enforcement of investor property rights (Allen et al., 2006). On average, we find an insignificant price reaction to the announcement of rights issues by Indian firms. When we examine differential price reaction to the announcement, we find evidence broadly supportive of the tunneling hypothesis and agency cost explanations. The price reaction to the announcement of the issue was more negative for firms affiliated to a family group. A rights issue increases the cash resources or level of a firm's financial slack. We surmise that this provides greater opportunities for the controlling family shareholder to expropriate wealth from the firm to entities where the family group shareholder has greater comparative cash flow rights. Investors therefore react negatively to the announcement of the issue. We also find some evidence that higher levels of individual shareholding are associated with a more positive price reaction to the rights issue announcement. Our results support the arguments of Asuncion-Mund (2007), which states that the minority shareholder's interest in Indian firms must be increased for improved corporate governance. High levels of individual shareholding may expose the firm to a greater likelihood of takeover or impose greater market discipline on managers through the market for corporate control. High levels of individual shareholding may also be associated with greater public scrutiny or monitoring of the use of the proceeds of the rights issue. This ensures less investment in projects that do not enhance the wealth of all shareholders and the price reaction to the announcement of the issue is more positive. Overall the results should be of interest to regulators in the Indian capital market. Improvement of investor protection rights and corporate governance has the potential to improve the integrity of India's capital market and the ability of listed firms to raise new equity finance.