Studies on the use of hybrid securities by listed firms to raise capital in international markets have been limited. The existing evidence on the seasoned capital raising process has concentrated on straight equity and debt issues in the United States (US) market. The Australian market provides a unique comparative capital raising environment as it has a number of operating and structural features that are different to many other markets. These differences include the method of issuing securities (rights issues), underwriting contracts (standby contracts), the trading volume of securities (thin trading), the industry makeup of listed firms (a high number of resource firms) and characteristics of capital raising instruments (convertible debt is non callable and is the only type of listed debt instrument, options are used as stand alone instruments to raise capital). This research focuses on how these differences give rise to differences in the share price reaction to security issues, the relevant explanations of the share price reaction, the security choice decision and the demand for underwriter services in the Australian market, compared to other markets. The impact of the announcement of hybrid security issues is examined using event study methodology adjusted for thin trading (as per Maynes and Rumsey(1993). Australian markets have differing characteristics to international markets including differing issue and issuer characteristics of hybrid security issues. However, the announcement effect evidence for Australian hybrid issues is consistent with international evidence for convertible debt issues but is inconsistent for company issued options and preference shares. Announcements of convertible debt are met with a significant negative share market response, a positive pre announcement runup and negative post announcement dnft, similar to US and UK issues. Although the announcement of an option issue can be viewed as an issue of delayed equity, option issues are met with a significant positive share price response rather than the negative share price response found for international equity issues. Announcements of preference share issues are met with an insignificant positive share price response which is in contrast to US and UK results. The results of the analysis of the explanation of the announcement effect of issuing new hybrid securities in the Australian market, suggest that different variables are significant explanators for the Australian market compared to international markets. The results of the models developed for the explanations of the announcement effect of Australian hybrid issues differ across security type. In general, the results for Australian issues of hybrid securities provide the greatest support for variants of the information asymmetry hypothesis. Convertible debt issues are best explained by the general information asymmetry hypothesis and the information asymmetry : external monitoring hypothesis. Option issues are best explained by information asymmetry : rights issues information asymmetry : signalling and agency cost hypotheses. Preference share issues are best explained by information asymmetry : rights issues, information asymmetry : external monitoring and the information asymmetry : signalling hypothesis. The security choice decision between hybrid securities is examined using logit regression analysis. When the choice is restricted to options and convertible debt, firms with high financial risk (leverage) and firm nsk (share volatility) are more likely to issue equity or in this study, equity like securities (options) and firms with higher pre announcement returns and larger issue size are more likely to issue debt or debt like securities (convertible debt). When the choice is extended to include preference shares, firms with high firm risk are more likely to choose options and firms making a relatively large issue are less likely to choose options (when financial risk is measured as long term debt over total assets) or more likely to choose convertible debt (when financial risk is measured as long term debt over equity). The determinants of underwriter use are examined using logit regression analysis for option issues as they are the only type of hybrid instruments that are not mostly underwritten. The results for the demand for underwriter services show that issue size, trading frequency and market risk are the determinants of the use of underwriters for Australian option issuers. This implies that mangers are more likely to choose to use an underwriter, the higher the amount of capital to be raised, the higher the trading frequency of the shares and the lower the market risk. The results are similar to partial results found for New Zealand and Norwegian equity issues where subscription price discount, issue size, firm risk, trading frequency, shareholder concentration and shareholder precommitments are determinants of underwriter use.
| Identifer | oai:union.ndltd.org:ADTP/187451 |
| Date | January 2001 |
| Creators | Suchard, Jo-Ann Clair, Banking & Finance, Australian School of Business, UNSW |
| Publisher | Awarded by:University of New South Wales. School of Banking and Finance |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | Copyright Jo-Ann Clair Suchard, http://unsworks.unsw.edu.au/copyright |
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