The performance of secondary equity offerings on the Johannesburg Stock Exchange

Abstract

International studies have widely documented the long-run underperformance of firms conducting secondary equity offerings (SEOs), a phenomenon commonly referred to as the ‘new issues puzzle’. Understanding the market’s reaction to SEOs is vital for managers who are commonly tasked with deciding on how to finance their firm’s operations. This study investigates the short-run and long-run performance of firms conducting SEOs on the Johannesburg Stock Exchange (JSE) over the period of 1998 to 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%. Using a buy-and-hold abnormal return approach, as well as factor regression analysis to study the long-run share performance of issuing firms, there is no evidence that issuing firms significantly underperform relative to non-issuing firms over a five-year period when testing for abnormal share return performance with the Capital Asset Pricing Model. Furthermore, issuing firms exhibit no consistent signs of operating underperformance in comparison to non-issuing firms over a fiveyear period. Finally, in evidence contradicting the market timing theory, investor sentiment appears to bear no consistently significant influence on either a firm’s decision to issue equity, or on the short-run and long-run performance of SEOs. Overall, the results imply that the longrun performance of SEOs conducted in South Africa is best described by rational explanations centred on the risk-return framework. There is no consistent evidence of any ‘new issues puzzle’ on the JSE.