When Do Firms Issue New Equity? Evidence from the UK

Abstract

Earlier evidence has shown that there are substantial time-varying fluctuations in the issuance activity of IPOs and SEOs. Utilizing a comprehensive dataset of 3054 IPOs and 2853 rights issues launched on the London Stock Exchange (LSE) during the time periods (1987-2007) and (1975-2007) respectively, this study aims to conduct a comprehensive analysis of the main alternative determinants of timing of IPOs and rights issues in a unified framework. Three main theories are tested: (i) favorable business and economic conditions; (ii) stock market conditions: bull market timing versus behavioral timing, and (iii) decreasing adverse selection costs and information spill-over. This study explicitly deals with the methodological and econometric challenges associated with modeling the IPOs and rights issues as time-series non-negative count variables via using auto-regressive Poisson model. The findings are significantly consistent with the adverse selection story; firms tend to make more equity offerings during periods of reduced asymmetric information and market uncertainty, robust to the data frequency and variables tested. These findings stand in line with Gerbich (1996) for UK IPOs and Lowry and Schwert (2002) for US IPOs. For rights issues, the findings exhibit that UK seasoned firms tend to time their offerings mostly during periods of bull stock prices, which is consistent with Michailides (2000) for UK rights issues.