The impact of global equity offerings

TheImpactofGlobalEquityOfferings*SusanChaplinskyandLathaRamchand*November1999*ForthcominginTheJournalofFinanceTheImpactofGlobalEquityOfferingsAbstractThisarticleexaminestheimpactofU.S.firmsissuingequityinmultiplemarkets.WecomparethestockpricereactionsofannouncementsofglobalequityofferstoacontrolgroupofissuesofferedexclusivelyinthedomesticU.S.market.Allelseequal,thenegativepricereactionthattypicallyaccompaniesequityissuanceisreducedby0.8percentwhensomesharesaresoldabroad.Theoverallevidencesuggestsglobaloffersareeffectiveinexpandingdemandandreducingthepricepressureeffectsassociatedwithshareissuance.Thebenefitsofglobaloffersappeartobeassociatedwithanincreaseinthenumberofforeignshareholders.Thesearchfornewcapitalmarkets--andlowercostsofcapital--isanongoingsearchformostfirms.InrecentyearsthenumberofU.S.firmsissuingcommonequityininternationalmarketshasincreasedsignificantly.In1985U.S.firmsraised$89millionthroughfollow-onequityoffersinforeignmarketsandthisamountincreasedto$18,915millionin1995--agreaterthan200foldincreaseinnominalterms.Thispaperfocusesonfollow-onglobalequityissuesbyU.S.firmsandattemptstoassesswhyfirms,widelyacknowledgedtohaveaccesstobroadanddeepdomesticcapitalmarkets,increasinglyseektoraiseequityabroad.TheglobalequityofferingsweexamineinvolveasimultaneoussaleofcommonequityatthesameofferpriceintheU.S.marketandoneormoreinternationalmarkets.Weexaminethecharacteristicsoftheissuersandissuesandinvestigatetowhatextentthewiderdistributionofsharesaffectsthepricingandcostsoftheseissues.OurmainlineofinquiryexamineswhetherthedistributionofsharestomultiplemarketsresultsinahigherofferpriceforequitysharesthanwouldbeobtainedhadthesharesbeensoldexclusivelyintheU.S.market(domesticoffers).Underperfectcapitalmarkets,firmsfaceaninfinitelyelasticdemandcurveandtheofferpriceforsharesshouldbethesameregardlessofthemarketofissue.However,imperfectionsintheformoftaxes(KimandStulz(1988)),governmentimposedinvestmentrestrictions((StulzandWasserfallen(1995),LodererandJacobs(1995),andEunandJanakiramanan(1986)),transactionscosts(AmihudandMendelsohn(1986))andinformationcosts(Merton(1987)andWelch(1992))caninhibittheintegrationofdomesticandinternationalmarkets.Theexistenceofsuchimperfectionssuggeststhatcapitalmarketsarecharacterizedbydownwardslopingdemandcurves.Equityissuesgenerallyresultinanincreaseinthesupplyofshares.Withdownwardslopingdemand,anincreaseinthesupplyofsharesisaccompaniedbyadeclineinprice,ceterisparibus.Hence,forglobalissuestoresultinahigherofferpricethandomesticissuesrequiresthattheincreaseinthesupplyofsharesbeaccompaniedbyanexpansioninthedemandforshares.2Usingasampleofoffersfrom1986to1995,wefind,allelseequal,thatthenegativestockpricereactionthataccompaniesequityissuesisreducedby0.8percentonaverageforglobalofferscomparedtodomesticoffersofsimilarsizeissuedduringthesametimeperiod.Additionally,wefindnoevidencethatthemorefavorablepricereactionforglobaloffersisoffsetbyhigherunderwritingspreadsandexpensesorbyadversepricemovementsduringtheofferinginterval.Consequently,thereisanetbenefittoglobalissuancethatisconsistentwithexpandeddemandforshares.ThisbenefitisofsufficientmagnitudetoprovidestrongeconomicmotivationforsomeU.S.firmstooffersharesinmultiplemarkets.Weattempttoidentifythesourcesofthebenefitbyfocusinginparticularontworationalesthathavebeenadvancedforglobalequityissues.First,thedevelopmentofinternationalequitymarketsgivesissuersaccesstoanexpandedpoolofinvestorsandissuerscantargetthesaleofsharestomarketswherethedemandforU.S.sharesisstrong.U.S.issuersmaymovesharesabroadwhenpoorU.S.marketconditionslimitthedemandforsharesinthedomesticmarket.Second,globalissuesattempttoincreasethe‘namerecognition’ofU.S.firmsininternationalmarkets,andthesetransactionsmaybehelpfulinreducingtheinformationcostsofforeigninvestorsinpurchasingsharesofU.S.firms(Merton(1987)andWelch(1992)).OurfindingsindicatethatglobaloffersoccurinperiodsofrelativelystrongU.S.marketperformancecomparedtoforeignmarkets.Hence,themorefavorablepricereactionsofglobaloffersarenotexplainedbyissuers’attemptsto‘escape’poordomesticU.S.marketconditions.Inaddition,wefindthattheannouncementdatepricereactionissignificantlymorefavorableforglobalissuesthelargeristheincreaseinthenumberofforeignshareholders.ThisisconsistentwithMerton’s(1987)argumentthatanissuer’scapitalcostscanbereducedbyincreasingthenumberofinvestorswhoknowaboutthefirm.Thispaperisorganizedasfollows:SectionIdescribestheinstitutionalfeaturesofaglobalequityofferingandprovidesthemotivationforourmaintestofthebenefitsofglobaloffers.SectionIIdescribestheglobalanddomesticequityoffersandexaminesempiricallythepricereactionofcomparableglobalanddomesticoffers.InSectionIIIweinvestigatethepotentialsourcesofbenefitstoglobalissuance.SectionIVgivesourinterpretationoftheresultsandconclusions.3I.ComparisonofGlobalandDomesticEquityOfferingsA.InstitutionalFeaturesofaGlobalOfferWebeginwitha‘thumb-nail’sketchofatypicalglobaloffer.GlobalequityofferingsbyU.S.firmsinvolvethesimultaneoussaleofcommonequityinthedomesticU.S.marketandoneormoreinterna