8 September 2008
Fully-underwritten rights issues in Australia are a powerful indicator of a company's superior value and attract the most favourable market reaction, an extensive study led by Monash University researchers has found.
The study's lead author, Dr Balasingham Balachandran from Monash's Faculty of Business and Economics, said the study was the first piece of empirical support for the notion that superior-quality Australian firms were more likely to use fully-underwritten rights issues.
"It's clear that shareholders view fully-underwritten issues as a strong signal of the superior quality of the issuing company," Dr Balachandran said.
"Our study indicates that a fully-underwritten rights issue raises shareholders' confidence in the value of the issuing company's shares, increases their take-up of the issue and leads to the most favourable market reaction."
The study considered the impact of all rights issues announced by ASX-listed Australian companies from 1995 to 2005.
To isolate the impact of a company's rights issue announcement on its share price ('market reaction'), the researchers excluded from their study issues announced in conjunction with temporary trading suspensions or market-influencing events such as mergers and share buybacks. This left 636 rights issues to be examined.
Of all rights issues examined, 60 per cent were fully-underwritten, 34 per cent were non-underwritten and 6 per cent were partially-underwritten. Of all rights issues, almost two in five were renounceable.
The researchers found:
-- fully-underwritten issues resulted in an average 6.85 per cent better market reaction than partially underwritten issues and a 3.27 per cent better reaction than non-underwritten issues.
-- fully-underwritten issues attracted an average 22 per cent higher shareholder take-up than partially-underwritten issues and a 3 per cent higher take-up than non-underwritten issues.
-- renounceable issues attracted a 17 per cent higher take-up than non-renounceable.
-- the median price discount of all issues was 16.67 per cent. Issues discounted more heavily than the median resulted in a 3 to 5 per cent worse market reaction than issues discounted less than the median.
"This study indicates that companies use underwriter certification for rights issues and price them at a smaller discount to their current share price to signal the superior value of their current share price and shareholders respond favourably," Dr Balachandran said. "Shareholders take the poorest view of companies that manage to achieve only partial underwriting of rights issues."
Dr Balachandran conducted the Australian Research Council-funded study with Monash's Professor Robert Faff and Professor Michael Theobald, from the University of Birmingham. The study has been published in the Journal of Financial Economics, one of the world's top finance journals.
For additional information please contact Dr Balasingham Balachandran on +61 3 9903 2585 or Monash media officer Ryan Pedler on +61 3 9903 4842 or +61 417 568 781.
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