Determinants and the announcement effect of bond and equity issuance on JSE listed firms

Abstract

The main objective of this paper is to investigate which firm-specific determinants influence the likelihood of issuing debt and moreover if the announcement of debt and equity issues exhibit any abnormal returns on days surrounding the event. To discover what drives the likelihood of issuing debt as a form of financing decision, five firm-specific explanatory variables (Size, Profitability, Managerial Ownership, Tangibility and Market-to-Book ratio) have been selected and regressed against a debt issue announcement. A sample of 81 bond issue announcements and 113 equity issue announcements of 69 JSE-listed firms during the period January 2000 to January 2020 is used to conduct a regression analysis and an event study analysis. The main findings of the study indicate that size, managerial ownership and market-to-book variables are statistically significant in driving the likelihood of issuing debt over equity. Both size and managerial ownership established a positive relationship with a debt issuance and the market-to-book ration established a negative relationship with debt issuance. Over and above the regression analysis, the event study conducted reveal that there are negative significant abnormal returns associated with the announcement of equity issues on days surrounding the event date.