The short-run performance of equity issues in South Africa: Bad timing or a last resort?

Abstract

Understanding the stock market’s reaction to secondary equity offerings (SEOs) is vital for managers who are commonly tasked with deciding on how to finance their firm’s operations. This study investigated the short-run performance of firms conducting equity issuance on the Johannesburg Stock Exchange (JSE) over the period 1998–2015 by exploring both rational and behavioural models in predicting SEO behaviour. Event-study analysis reveals that the market generally reacts negatively to the announcement of SEOs with a statistically significant average two-day cumulative abnormal return of -2.6%. We also found that the probability of a firm conducting a SEO is significantly negatively related to the number of years listed and the future share return. Although it would make sense that more corporate activity takes place during periods of high investor sentiment, there is no significant evidence that firms conducting SEOs are attempting to time the market.

Managerial confidence and capital structure announcement effects on share prices on the Johannesburg Share Exchange

“…Therefore, based on the assumption that managers are well informed when it comes to their own share valuation, an equity issue may signal to the market that the firm's share price is overvalued. The literature on the effects of corporate financing activity on the share price shows that the use of external financing by means of an equity issue is perceived as unfavourable news to the market (See Covitz & Harrison 1999;Kim, Ko & Wang 2019;Miller & Rock 1985;Myers & Majluf 1984;Seetharam & Da Cunha 2018). Consequently, an equity issue is likely to be followed by a decline in the share price.…”