Brazilian market reaction to equity issue announcements

Abstract

We 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.

Secondary Equity Offer Announcements and Share Returns at Nairobi Securities Exchange, Kenya

“…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 market models are preferred and commonly applied in financial research.…”

“…Management is expected to set a target debt to equity ratio that will optimize the value of the company and actively seek to employ equity and debt financing sequentially to attain the target or optimal level. Medeiros and Matsumoto (2005) argue that when a company raises finance through secondary equity offers, investors assume that management are seeking to attain the optimal capital structure that will maximize the value of the company. Consequently, the static trade off theory hypothesizes that secondary equity offer announcements have a positive effect on share returns.…”

“…The average cumulative abnormal share returns were computed using model (11) as specified by Brown and Warner (1985) and MacKinlay (1997). To establish whether abnormal share returns were significant there was need to determine whether the average cumulative abnormal share returns were statistically different from zero (Medeiros & Matsumoto, 2005). This procedure used a t test statistic and tested the null hypothesis that the average cumulative abnormal share returns were not significantly different from zero during the event period.…”