This paper studies the abnormal returns of seasoned equity offerings over short- and long-run horizons in Germany and their determining company characteristics. Contrary to previous findings for the German market, I find that the abnormal returns around the announcement are significantly negative with Run Up, Volatility, Firm Age and Earnings per Share as explanatory variables. The long-run abnormal returns are also significantly negative. The determinants of abnormal returns in the long-run are Run Up, Firm Age, Transaction Size, Size, Leverage and Profit Margin.
The findings suggest that there is a structural break in the German market in 2002/2003. Furthermore, the theoretical explanations suggested in prior research on the U.S. market are also valid for the German market.
Table of Contents
1 Introduction
2 Literature review
2.1 Short-run Analysis
2.2 Long-run Analysis
2.3 German Evidence
3 Data
4 Methodology
4.1 Abnormal Announcement Return
4.2 Abnormal Buy-and-Hold Return
4.3 Company Characteristics
4.4 Robustness Tests
4.4.1 Industry-adjusted Variables
4.4.2 Outlier Robustness
5 Results
5.1 General Findings
5.2 Short-run Findings
5.3 Long-run Findings
5.4 Robustness Tests
6 Conclusion
Research Objectives and Focus Areas
This paper examines the short-run and long-run abnormal returns associated with seasoned equity offerings (SEOs) in Germany, aiming to identify the underlying determinants of these performance patterns and determine if U.S.-based theoretical findings hold within the modern German market structure.
- The impact of seasoned equity offerings on short-term and long-term abnormal returns.
- Evaluation of company-specific characteristics as potential determinants of abnormal returns.
- Investigation of a structural market break in Germany around 2002/2003.
- Testing the applicability of U.S. signaling and behavioral theories in the German context.
- Analysis of the efficacy of different statistical robustness tests (e.g., industry-adjusted variables, outlier robust regressions).
Extract from the Book
1 Introduction
Commerzbank’s recent capital increase on 28/05/2013 has raised heated discussions about wealth destruction and dilution following equity offerings in Germany. Commerzbank AG conducted their 8th issue of new equity capital within a 5-year period, raising public awareness about such corporate events. Although Germany is one of the world’s leading economies, academic and practical research on the short-run performance around the announcement and the long-run performance after the offering is relatively rare and outdated.
Previous research on the German market in various fields has always been inspired by the difference in market structure between Germany and the U.S. Especially, the differences of bank-based versus market-based financing and the presence of Civil Law instead of Common law provide an environment to inspect the universality of U.S. findings. Moreover, Germany’s stock market has a much higher concentration in ownership than the U.S., with a high number of influential block holders present in many firms. Regarding SEO research, a close relationship to the principal bank (Hausbank) as one of the underwriters and a higher concentration in ownership are factors that reduce asymmetric information. Therefore, abnormal returns around an equity offering may be less severe for German firms than for U.S. firms. Studies on German SEOs over sample periods before 2000 indeed report positive abnormal returns, contrary to U.S. studies.
However, the German market structure has significantly changed in the last 10 years. After the burst of the dot-com bubble, German investors lost trust in the market and firms needed to raise foreign capital. Through the introduction of improved transparency standards in the equity and debt market and by reinforcing shareholder protection, firms positioned themselves to attract international investors. Fundamental milestones were the change in reporting language to English, the adoption of international accounting standards, the introduction of the Prime / General Standard in 2003 and various legal changes to facilitate investing in Germany.
Summary of Chapters
1 Introduction: This chapter provides the motivation for studying SEOs in Germany, noting the historical lack of research and significant shifts in market structure that warrant a new investigation.
2 Literature review: This section details the existing academic discourse on SEO short-run and long-run abnormal returns, focusing on signaling, behavioral theories, and prior evidence from the German market.
3 Data: This chapter outlines the selection criteria and composition of the sample, which includes trading SEOs by German firms listed in the Prime or General Standard between 1995 and 2010.
4 Methodology: This section presents the event study and buy-and-hold methodologies used to calculate abnormal returns, as well as the regression approach and robustness tests employed.
5 Results: This chapter discusses the empirical findings regarding abnormal returns and regresses these on company characteristics, confirming the significance of variables like Run-Up and Volatility.
6 Conclusion: This final chapter synthesizes the key findings, confirming that the German market exhibits patterns similar to those in the U.S., while acknowledging methodological limitations.
Keywords
Seasoned Equity Offerings, Germany, SEO, Abnormal Return, Buy-and-Hold Return, CAR, BHAR, Asymmetric Information, Signaling Effect, Earnings Management, Market Structure, Structural Break, Regression Analysis, Volatility, Capital Increase
Frequently Asked Questions
What is the primary focus of this research paper?
The paper focuses on analyzing the abnormal stock returns of German firms following seasoned equity offerings, both in the short-term around the announcement and in the long-term after the offering.
What are the central thematic areas covered in the analysis?
Key areas include the impact of firm-specific characteristics (such as Run-Up, Volatility, and Firm Age) on abnormal returns and the testing of U.S.-developed signaling and behavioral theories in the German financial market.
What is the core objective of the study?
The objective is to provide a comprehensive analysis of whether seasoned equity offerings lead to wealth destruction in Germany and to determine if historical findings of positive abnormal returns remain valid given recent structural market changes.
Which scientific methodology is utilized?
The study uses standard event study methodology for short-run returns and buy-and-hold abnormal return (BHAR) calculations for the long-run, utilizing OLS regression models and robust outlier tests like LAD and winsorized regressions.
What does the main body of the work address?
The main body covers the literature review of international and German evidence, detailed data collection criteria, the specific methodology for calculating returns, and the results of various regression analyses.
Which keywords characterize this investigation?
Key terms include Seasoned Equity Offerings (SEO), abnormal returns, asymmetric information, signaling effect, earnings management, and the German stock market.
What conclusion does the author reach regarding the structural break?
The author concludes that there is evidence of a structural market break in Germany around 2002/2003, moving the German market environment closer to that of the U.S.
Why are outliers specifically handled in the methodology?
Outliers were specifically addressed using median and winsorized regressions because standard OLS regression results were found to be sensitive to extreme observations in company characteristics, which could otherwise bias the conclusions.
How does the author view the "Windows of Opportunity" theory?
The author finds that "Windows of Opportunity" and earnings management theories provide valid explanations for the deferred negative reaction to the signaling of overvaluation in the long-run.
- Citar trabajo
- Andre Domes (Autor), 2013, Seasoned Equity Offerings in Germany. Determinants of Short- and Long-run Abnormal Return, Múnich, GRIN Verlag, https://www.grin.com/document/413705
