Control variables

The control variables are used in previous studies to explain the stock price effects associated with equity issues and equity issuance methods. Most of these variables are based on theories that have been explored extensively in the literature. In addition to variables that explain equity issues in general as discussed in preceding sections, other variables specifically determine the choice among the equity issuance methods. Following the extant literature, the variables are defined in the same manner to reflect the same effects as indicated in the literature. The proxy for each variable is discussed as follows: i. Mispricing (MB)

Mispricing affects the choice of equity issuance method due to its relation to high information asymmetry (Livingston et al., 2005). Moreover, Slovin et al. (2000) and Barnes and Walker (2006) find that overvalued equity are issued to existing shareholders rather than privately placed with external investors. However, Capstaff and Fletcher (2011) assert that rights issuing to existing shareholder are less likely to be overvalued. Thus, all else equal, high MB is

negatively related to the probability of rights issues and positively related to private placement and open offers. MB is defined in the Section 5.3.1.2.

ii. Pre-issue Abnormal Returns (Prior AR)

AR is the cumulative abnormal stock returns (CAR) estimated using the market

model over estimation window (-255,-21) relative to the announcement date. The pre-issue AR is the cumulative abnormal returns from day -30 through day

-2. Thus, the AR is defined as CAR (-30,-2). It is expected that AR should have a positive relationship with mispricing and thus increase the probability of equity issues through private placement.

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iii. Firm Size (SIZE)

Firm size is measured as the natural logarithm of book value of total assets and has a positive relationship with equity issues. This is because large firms to have low information asymmetry and are less likely to be mispriced. Large firms are mostly matured entities that have exhausted growth options but are highly followed by analysts. Small firms possess considerable growth opportunities, low leverage yet greater uncertainty due to information asymmetry.

iv. Discount (DISC)

Empirical evidence suggests that equity issues are associated with significant discounts between the offer price and the market price at the announcement date. Armitage et al. (2012) find that about 90% of UK open offers and placings are at a discount of about 26%. However, for large discounts existing shareholder value is more protected if rights offering are used to issue equity. This is because discount transfers wealth to the new investors that will subscribe to the equity issues, when the discounted equity is issued to external investors through private placement. While this constitutes costs to existing shareholders who do not participate the new shares, due to lack of pre-emptive rights, the discount could compensate placees for the cost of investigating the issuer (Hertzel and Smith, 1993; Balachandran et al., 2013). However, Barclay et al (2007) contend that the large size of the discount undermines such conjecture.

Following the information asymmetry hypothesis, overvalued firms should attract high discounts (Hertzel et al, 2002). Armitage et al. (2014) establish that discounts are related to illiquidity of issuers‟ shares, financial distress and inelastic demand for the shares. Slovin et al. (2000), Armitage (2002), and Balachandran et al. (2008) report that rights issue price reaction is significantly and negatively related to the issue discount. However, Barnes and Walker (2006) assert that high discounts are more likely to be associated with placings than rights issues. This is consistent with overvaluation effects that evoke equity issues through placings. High discount (more negative value) is more

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likely to be associated with issues that reflect overvaluation. Thus, equity issues are timed should attract deep discount to compensate investors.

Issue price discount is calculated using the Barnes and walker (2006) and Armitage et al. (2014) formula that compares the pre-announcement date market price and the offer price. Thus, discount is given as follows:

, Where:

is the offer price stated in SDC at the announcement date of the equity issues

is the prior announcement date market price reported

v. Accruals Quality (AQ)

Consistent with the information asymmetry and earnings management hypotheses, firms with better accrual quality are more likely to issue equity to existing shareholders. Hertzel and Smith (1993), Wu (2004), Balachandran et al. (2013) argue that firms since private placement investors can obtain the true value of the firm at a cost; firms with high information asymmetry are more likely to issue equity through private placements. Accruals quality is the modified Dechow and Dichev (2002) measure of earnings quality defined in the preceding sections. This is consistent with studies such as Lee and Masulis (2009), Balachandran et al. (2013), and Armitage et al. (2014),

Where:

=total current accruals= current assets- current liabilities- cash+

debt in current liabilities; =changes from year to year

= cash flow from operations= net income before extraordinary items- total accruals and total accruals=current accruals-depreciation and amortization;

=total sales revenue

market market offer it P P P DISC offer P market P it it it it it it i

it CFO CFO CFO SALES PPE

CA _{1 1 2 3 1 4 5} it CA t t 1 CFO SALES

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= property, plant and equipment. Each of the variables is scaled by the

average of total assets between year and year .

Accruals quality ( ) is computed as the standard deviation of the regression residuals from through where larger standard deviation at year reflects a poor earnings quality and hence high asymmetric information. All variables are scaled by average total assets over year t-1 and t. Overall, four regressions

using a total of four lagged values and one lead value of data over the sample period 1989-2011 is estimated. The firm-specific measure of earnings management is the standard deviation of the four regression residual values. Larger standard deviations suggest poor accruals quality and greater information asymmetry. This variable is denoted as ACC_QUAL.

vi. Idiosyncratic Risk (IDYRISK)

Idiosyncratic volatility is measured as the standard deviation of the excess market return relative to the date of equity issue announcements (Dierkens, 1991; Krishnaswami and Subramanian, 1999). Balachandran et al. (2013) find lower idiosyncratic risk for rights offerings than open offers and placement. This indicates that issue to existing shareholders do not produce adverse selection costs that are associated with external shareholders. Hence, firms with lower asymmetric information are more likely to conduct rights offerings. Therefore, lower idiosyncratic risk indicates that the firm is higher quality firm (Balachandran et al., 2008).

vii. Financial Crisis (CRISIS

Financial crisis is an indicator variable of 1 for the period 2008-2010 and 0 otherwise.