Brazilian market reaction to equity issue announcements

Abstract

RESUMOO trabalho relata um estudo de evento para investigar a reação do mercado antes, durante e após os anúncios de emissões de empresas brasileiras, entre 1992 e 2003. Após mensurar os retornos anormais por mínimos quadrados, utilizou-se modelos ARCH e GARCH para 70% da amostra. Os resultados são consistentes com a literatura internacional. Alguns resultados empíricos antecedentes evidenciaram retornos anormais anteriores ao anúncio, interpretados como indícios de informação privilegiada. Tal evidência também aparece no presente estudo, onde se encontrou um retorno anormal cumulativo médio de -0,01 a três dias antes do anúncio. Com relação à data do anúncio, a literatura existente é virtualmente unânime em relatar retornos anormais negativos, significando que emissões de ações transmitem informações pessimistas ao mercado. O presente estudo confirma tais achados com um retorno anormal cumulativo médio de-0.03 nos três primeiros dias após os anúncios. A literatura empírica também acumulou evidências de retornos anormais negativos no longo prazo após as emissões de ações, o que também foi confirmado na presente pesquisa, com um retorno anormal cumulativo médio de -0,28, um ano após os anúncios. Os resultados também mostram que a estimação dos retornos anormais por ARCH e GARCH é superior àquela realizada por mínimos quadrados.Palavras-chave: estudo de evento; mercado de ações; retornos anormais; ARCH; GARCH; empresas brasileiras. ABSTRACTWe have carried out an event study to investigate stock returns associated with the announcement of equity issues by Brazilian firms between 1992 and 2003 in order to determine market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. Our results are remarkably consistent with most of the international empirical literature. Some previous empirical findings have turned up abnormal returns before the announcement date, interpreted as signs of insider information. This evidence also appears in our study as we found an average cumulative abnormal return of -0.01 three weeks before the announcement. With respect to the announcement date, the evidence reported in the literature is virtually unanimous in showing negative abnormal returns, meaning that stock issues convey pessimistic information to the market. Our study confirms these findings with an average -0.03 cumulative abnormal return on the first three days following the announcement. Finally, the empirical literature has also collected evidence of long-term negative abnormal returns after the issues, which we also confirm, with an abnormal return of -0.28 after one year following the announcement. The results also show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation.

Stock price reactions to capital structure changes in Chilean firms: Examining the effects of ownership structure, growth opportunities and leverage

“…Their results supported Asquith and Mullins (1986) and Masulis and Korwar (1986), which showed that stock price reactions were positive during periods preceding announcements and issuances, and negative at the moment of announcement and issuance . Other international studies have corroborated these findings for developed markets (Healy and Palepu, 1990;Eckbo and Masulis, 1992;Mitto, 1996;Burton et al, 2000;Welch, 2004; Barnes and Walker, 2006) as well as emerging markets (Leal and Amaral, 2000;De Medeiros and Matsumoto, 2005;Vithessonthi, 2008aVithessonthi, , 2008bVithessonthi, , 2008cChen and Shehu, 2009;Liu et al, 2016). Furthermore, these papers have documented that abnormal returns decrease more for equity issuances than for debt issuances.…”

Firm Factors and Share Returns of Secondary Equity Offers at Nairobi

“…According to Brown and Warner (1985), price models and market models can be used to estimate expected share returns. Medeiros and Matsumoto (2005) point out that price models possess intricate econometric issues such as non-stationarity of price series and thus return models are preferred and commonly applied in financial research. The market return Model (2) was used to compute expected share returns and is based on the assumption of a constant and linear relationship between individual share returns and the return on a market index.…”

Comparative analysis of company market reactions on right issue for pay debt and investment

“…Yusuf (2009) stated that there were differences in the average abnormal return before and after the announcement of the rights issue because the old shareholders assumed that with the right issue the company would operate better than before. Medeiros (2005) and Kithinji (2014) state that there are differences in abnormal returns before and after the right issue because it is assumed that the announcement of the rights issue is positive information for the old shareholders. The right issue is positive if the funds obtained are invested in the project, especially those that promise high returns, be it new investment projects or increased working capital (Sukwadi, 2006).…”

“…Old shareholders who want to maintain or actively participate in controlling the company, they will buy the rights issue. Old shareholders who don't want to get too into the company's control, the old shareholders will not buy the right issue (Medeiros, 2005). Right issues are usually issued at prices cheaper than market prices, this is intended as an incentive for the old shareholders.…”

“…Right issue aimed at investment will lead to market confidence because the funds collected from the results of the rights issue will provide benefits in the future. Medeiros (2005), states that there are differences in abnormal returns before and after the right issue because it is considered that the announcement of the rights issue is positive information for the old shareholders. This causes the market to react with a positive abnormal return.…”