Pacific-Basin Finance Journal 10 Ž2002.

29–54
www.elsevier.comrlocatereconbase

Private placements and rights issues

in Singapore
Ruth S.K. Tan a,) , P.L. Chng a , Y.H. Tong b
a
National UniÕersity of Singapore, Singapore, Singapore
b
Nanyang Technological UniÕersity, Singapore, Singapore
Received 20 October 2000; accepted 5 May 2001

Abstract

This study documents positive announcement effects of seasoned equity issues in

Singapore for the period 1987–1996. For rights issues, we find higher abnormal returns for
firms that undertake larger issues. The issue size reflects the magnitude of favorable news
on the issuing firms’ earning prospects. When firms announce investment opportunities or
capital expenditure simultaneously, the positive impact is even greater. For private place-
ments, the abnormal returns are positively related to the placement price. The greater is the
requirement for external equity financing, the higher is the placement premium. Issue size
seems to reflect the impact of investment opportunities on the firms. q 2002 Elsevier
Science B.V. All rights reserved.

JEL classification: G14; G32

Keywords: Private placements; Rights issues; Seasoned equity issues; Investment opportunities

1. Introduction
This paper investigates stock price reactions to announcements of seasoned
equity issues in Singapore. A seasoned equity issue is typically undertaken by way
of a public offering, a rights issue or a private placement. In a public offering,
newly issued shares are sold to the general public. In a rights issue, existing

)
Corresponding author. Faculty of Business Administration, National University of Singapore,
FBA1, Level 4, SM1 04-08 15 Law Link, Singapore, 117591, Singapore. Tel.: q65-874-6265; fax:
q65-779-2083.
E-mail address: fbatansk@nus.edu.sg.

0927-538Xr02r$ - see front matter q 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 7 - 5 3 8 X Ž 0 1 . 0 0 0 2 8 - 2
30 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

shareholders are granted pre-emptive rights to purchase the newly issued shares of
the listed firm. In a private placement, new shares are sold to institutions andror
high net worth individuals.
Under the continuing listing requirements set by the Singapore Exchange
ŽSGX., a listed firm may undertake a seasoned equity issue through either a rights
issue or a private placement. Public offerings of seasoned equity, common in the
United States, are not allowed under the SGX continuing listing requirements. The
main aim of this paper is to examine the impact of seasoned equity on shareholder
wealth and to identify the relevant factors that explain the associated price
reactions.
The majority of research on the effects of seasoned equity issue in the United
States is based on public offerings. These studies documented consistent negative
abnormal returns on equity value when public offerings are announced ŽSmith,
1977; Myers and Majluf, 1984; Masulis and Korwar, 1986; Eckbo and Masulis,
1992..
Studies on the announcement effects of rights issues have mixed results. Eckbo
and Masulis Ž1992. reported statistically significant negative abnormal returns for
rights issue in the United States. Loderer and Zimmerman Ž1988. investigated
rights issues in Switzerland and reported insignificant average abnormal returns as
did Smith Ž1977. in the United States. In contrast, Kang Ž1990. showed significant
positive abnormal returns for rights issues in Korea and Ariff and Finn Ž1989.
found positive abnormal returns in Singapore.
Private placement is the least-studied method of raising capital. Studies in the
United States showed that the stock price reactions are significantly positive on
announcements ŽWruck, 1989; Hertzel and Smith, 1993., which is in direct
contrast to public seasoned equity offerings in the United States. Similarly, Kato
and Schallheim Ž1993. showed that the share price reaction to private placements
in Japan is significantly positive.
This paper finds that announcements of seasoned equity issues in Singapore,
both rights issues and private placements, are associated with a positive re-evalua-
tion of the issuing firms. For rights issues, a positive 3-day average abnormal
return of approximately 2% is documented. This result is consistent with findings
reported in Korea, Greece and Switzerland but is contrary to the negative effects
documented in the United States. The abnormal returns are positively associated
with the size of equity capital raised. This suggests that the issue size reflects the
quantum of the investment opportunities, and hence, the magnitude of favorable
news on the issuing firms’ earning prospects. When firms announce investment
opportunities or capital expenditure simultaneously, the positive impact is even
greater.
For private placements, a positive 21-day average abnormal return of approxi-
mately 6% is documented. This is consistent with findings in the United States and
in Japan. We find a strong positive relationship between the abnormal return and
the price of the private placement shares. Private placement shares in Singapore
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 31

are usually sold at a premium. This is in contrast to the United States where
private placement shares are usually sold at a discount. In addition, we find that
the price is influenced by the size of the issue. The greater the requirement for
external equity financing, the higher the premium on private placement shares.
This suggests that the issue size reflects the magnitude of the investment opportu-
nities and their impact on the earning prospects of the firms.
The remainder of this paper is organised into seven sections. Section 2
discusses the theoretical concepts on the announcement effects of seasoned equity
issues. Section 3 describes the data. Section 4 details the methodology used to
examine the announcement effects and the findings. Section 5 discusses the
multivariate regression models and presents the findings. Section 6 provides a
multivariate analysis on the premium of private placement shares and Section 7
compares the findings for rights issues and for private placements. Section 8
concludes the paper.

2. Theoretical concepts
Several theories have been developed to explain the effects of seasoned equity
issues on stock prices.
2.1. Price pressure effects
The price pressure hypothesis states that firms are faced with demand curves of
finite price elasticity ŽScholes, 1972.. The cross-sectional relationship between the
changes in stock prices and the issue size has been tested extensively but with
mixed results ŽMarsh, 1979; Hess and Frost, 1982; Asquith and Mullins, 1986;
Masulis and Korwar, 1986..
Loderer et al. Ž1991. tested the relationship between the announcement abnor-
mal returns in a seasoned equity issue and the possible determinants of demand
elasticity. They found no evidence to suggest that the negative abnormal returns
were due to the determinants of price elasticity.
2.2. InÕestment opportunity effects
Miller and Rock Ž1985. theorised that firms are faced with constant investment
requirements and thus any changes in external financing constitute negative
signals about the firms’ current and potential earnings.
McConnell and Muscarella Ž1985. found that share prices react positively to
simultaneous announcements of investment opportunities or capital expenditure
during announcements of seasoned equity issues.
2.3. Wealth transfer effects
The wealth transfer effects hypothesis states that an unexpected issue of new
equity reduces the risk of the firm’s outstanding debt and consequently results in a
32 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

wealth transfer from shareholders to bondholders. Thus, seasoned equity issues are
associated with negative abnormal returns as the firm’s debt-to-equity ratio
decreases ŽDeAngelo and Masulis, 1980; Masulis, 1983..
However, Kang Ž1990. and Dhatt et al. Ž1996. observed positive abnormal
returns surrounding announcements of rights issues in Korea. They found that a
decrease in debt-to-equity ratio contributes to the positive abnormal returns and
attributed that to the reduction in financial distress.
2.4. Pricing effects
In theory, the subscription price in a rights issue is not a concern. However,
Heinkel and Schwartz Ž1986. and Loderer and Zimmermann Ž1988. argued that
the subscription price is a signal of firm quality. Assuming that firms do not
engage in false signaling and that markets are efficient, they showed that the
subscription price is a linear function of the difference between management’s
valuation of a share and the market price of that share.
2.5. Information asymmetry effects
In Myers and Majluf Ž1984.’s information asymmetry model for public offer-
ings of seasoned equity, managers are expected to approve a public offering only
if they believe that the firm is overvalued. This follows from the assumption that
managers act solely for the welfare of existing shareholders and that the managers
have superior insider information. Myers and Majluf Ž1984. also hypothesized that
firms undertake public offerings of seasoned equity only after a period of share
price increases.
Under Myers and Majluf Ž1984.’s information asymmetry model for public
offerings, firms shy away from public offerings to avoid releasing negative signals
about their value even though they may have viable investments that require
funding. This Aunderinvestment problemB can be avoided if managers are able to
convey their insider information to the market at no cost.
In their study of private placements in the United States, Hertzel and Smith
Ž1993. found positive abnormal returns surrounding the announcements of private
placements. They suggested that undervalued firms could avoid the negative
signals under Myers and Majluf Ž1984. assumptions by choosing private place-
ment over public offering. Hertzel and Smith Ž1993. information asymmetry
hypothesis for private placement predicts that the positive abnormal returns will be
magnified when the potential for undervaluation is higher. They found evidence to
support this.
2.6. Ownership structure effects
Ownership structure effects have been studied by looking at changes in the
level of ownership concentration. The higher the level of ownership concentration,
the easier it is for a small group of shareholders to influence management behavior
through their voting power. The more diverse the shareholding, the easier it is for
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 33

management to pursue their own interests as the level of influence by nonmanage-

ment shareholders decreases ŽMitchell, 1983..
Wruck Ž1989. proposed an ownership structure hypothesis in her study of
private placements in the United States. Her ownership structure hypothesis states
that both the changes in and the resulting level of ownership concentration are
important. She found positive abnormal returns surrounding private placements
that are directly related to changes in ownership level when the firms are at low or
at high level of ownership concentration after the placements. An inverse relation-
ship is found for sample firms with moderate level of ownership concentration
after the placements.

3. Data and descriptive statistics

This paper covers the period from the first quarter of 1988 to the second quarter
of 1996. The accounting information is compiled from the annual reports and from
the SGX Companies Handbooks.
Daily share prices, trading volume and market indices are downloaded from the
SGX Database.1
The announcement dates of these rights issues and private placements are
obtained from the Straits Times and the Business Times.2 The announcement
dates correspond with the first public announcements of these seasoned equity
issues. Information on the prices of and the purposes for these seasoned equity
issues are also obtained from these sources.
For the rights issues sample, the announcement dates correspond to press
releases of the firms’ intention to raise additional equity capital through a rights
issue. For the private placement sample, the announcement dates correspond to the
first press release of either a completed private placement or an ongoing private
placement. The difference in the identification of announcement dates is attributed
to SGX regulatory requirements. Under the SGX continuing listing requirements,
an issuer is required to announce the intention for rights issues promptly.
However, this is not required for private placements. Announcements of private
placements are made either in the process of placing out the shares or after the
placements are completed.
Sample firms must meet the following three criteria: Ža. announcements are
made in the Straits Times or Business Times; Žb. no concurrent bonus issue is
offered with the rights issue or private placement; and Žc. the price of and the
reasons for the seasoned equity issue can be identified. Altogether, 65 rights issues

1
The SGX Database are available online from Dbank – an electronic database retrieval service.
2
Press clippings from the Straits Times and Business Times are available from the
SingaporerMalaysia Collection of the Central Library and the Hon Sui Sen Memorial Library at the
National University of Singapore.
34 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

and 67 private placements are included in the study. Descriptive statistics are
reported in Table 1.
The 65 rights issues are for 56 firms. Nine firms undertook two rights issues
over the sample period. Simultaneous announcements of investment opportunities
or capital expenditure are observed for 34 rights issues.
The average proceed from these rights issues is S$81.60 million with a
minimum of S$2.36 million and a maximum of S$385.50 million. This represents
an average of 39.93% of the firm’s market value before the rights issue. The
average percentages for Switzerland and Greece are 17% and 58.9%, respectively
ŽLoderer and Zimmermann, 1988; Tsangarakis, 1996.. The average percentages
for rights issues and public offerings in the United States are 20.2% and 16.5%,
respectively. Firms in the United States prefer to raise capital through the bond
markets. The average percentage of public corporate bond issues in the United
States is 30% of the firm’s market value ŽMikkelson and Partch, 1986.. The
presence of an established bond market and the tax shield advantage makes bond
offering an attractive long-term financing alternative.
Out of the 65 rights issues examined, 64 are offered at an average discount of
36.31% to the closing share price on day t s y30. The average discount for rights

Table 1
Descriptive statistics
Panel A reports the descriptive statistics for 65 rights issues by 56 firms. Panel B reports the descriptive
statistics for 67 private placements by 56 firms. The sample period for both samples is from the first
quarter of 1988 to the second quarter of 1996. The market value of the firm is measured as the product
of the existing number of shares and the closing share price on day t sy30. The proceeds from
seasoned equity issues are measured by multiplying the number of issued shares by the issue price. The
price of the rights shares is measured relative to the closing share price on day t sy30. The
percentage change in ownership concentration Ž DOL. is the difference between the ownership
concentration of the firm before and after the private placement.
Panel A: Rights issues
Market value Proceeds Proceedsr Price
ŽS$ million. ŽS$ million. market value Ž%. Ž%.
Mean 50.83 81.60 39.93 63.69
Median 121.09 41.28 34.48 64.29
Minimum 9.59 2.36 2.65 22.57
Maximum 13150.84 385.50 139.24 123.46

Panel B: Private placements

Market value Proceeds Proceedsr Price DOL
ŽS$ million. ŽS$ million. market value Ž%. Ž%. Ž%.
Mean 473.21 40.46 10.93 113.73 y0.66
Median 215.47 22.50 10.49 108.00 y1.11
Minimum 17.25 1.68 0.88 76.03 y21.78
Maximum 215.47 286.00 28.78 207.69 19.44
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 35

issues in United States, Switzerland, Korea, and Greece are 12.4%, 37.4%, 42.2%
and 60.2%, respectively ŽEckbo and Masulis, 1992; Loderer and Zimmermann,
1988; Dhatt et al., 1996; Tsangarakis, 1996..
The 67 private placements are for 56 firms. Eleven firms undertook two private
placements over the sample period. Simultaneous announcements of investment
opportunities or capital expenditure are observed for 38 private placements.
The average proceed from the private placements is S$40.46 million, which
amounts to 10.93% of the firm’s market value. The average proceed from private
placements in the United States is US$11.38 million, representing 12.02% of the
firm’s market value ŽHertzel and Smith, 1993.. This ratio suggests that the relative
size of private placements is similar for Singapore and the United States.
The private placement shares are sold at prices ranging from 76.03% to
207.69% of the closing share price on day t s y30 with an average premium of
13.73%. Out of the 67 private placements examined, 51 are offered at a premium.
In contrast, private placement shares in the United States enjoy an average
discount of 20.14% ŽHertzel and Smith, 1993..
In Singapore, the average change in the level of ownership concentration as a
result of private placements is negative 0.66%. Wruck Ž1989. reported a negative
average of 7.7%, while Hertzel and Smith Ž1993. reported a positive average of
1.0% in their study of private placements in the United States.3

4. Analysis of announcement effects

4.1. Methodology

This paper employs the event study technique introduced by Ball and Brown
Ž1968. and Fama et al. Ž1969.. The announcement date of the rights issues and the
private placements is defined as day t s 0. The event window is from day
t s y30 to day t s 20.4

3
Hertzel and Smith Ž1993. attributed this difference to firm size. They noted that their sample
contained firms of smaller size than those in Wruck’s Ž1989. sample.
4
Daily abnormal return ŽAR. on day t for each share during the event window is calculated using
the following equation:
AR i ,t s R i ,t y E Ž R i ,t . ,
where AR i,t sabnormal return associated with stock i on day t, R i,t s return of stock i observed on
day t, EŽ R i,t . sexpected rate of return on stock i at period t. The average abnormal return ŽAAR. on
day t is defined as the average abnormal returns across all stocks. It is calculated as follows:
1 N
AAR t s Ý AR i ,t ,
N is 1
where AAR t saverage abnormal return on day t; AR i,t sabnormal return of stock i on day t;
N s total number of rights issues or private placements.
36 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

Sharpe’s Ž1964. Market Model 5 is used to establish the expected rate of return
Ž EŽ R i,t ... The period used for estimating the market is from day t s y200 to day
t s y60. Correction for thin trading is done via the Scholes and Williams’ Ž1977.
methodology.6
This paper aggregates the abnormal returns over long periods using the
buy-and-hold approach. The buy-and-hold approach provides the actual return that
an investor would earn by investing and retaining the stocks over the holding
period.7
The average holding period return ŽAHPAR., across all stocks from day t s j
to day t s k, is calculated by the following formula:

1 N 1 N
k
j AHPARs
N
Ý jk HPR i y N Ý HPR M ,i , Ž 1.
is1 is1

5
The Market Model states the following linear function between stock returns and market returns:
E Ž R i ,t . s a i q bi R M ,t q ´ i ,t ,
where EŽ R i,t . sexpected rate of return on stock i at period t; R M,t s rate of return of the market
portfolio at period t; a i s intercept of stock i, bi sslope coefficient of stock i, ´ i,t sdisturbance or
firm-specific return of stock i at period t.
6
As the equity market in Singapore suffers from thin trading, bias and inconsistent estimates of b
will result due to nonsynchronous effects ŽScholes and Williams, 1977.. Infrequently traded shares will
have downward biased b estimates while those traded relatively frequently will have upward biased b
estimates. The two period lag–lead model is used.
0 1
by1i q b 1 q bi
b̂i s ,
1q2 r
where bˆi s nonsynchronous trading corrected beta estimate for stock i; by1 0 1
i , b i , b i s beta estimates
from one-period lagged, the current and one-period leading specification of the market model in three
OLS regressions, respectively; r s first-order serial correlation coefficient between and R M, ty1 and
R M, t .
7
To calculate the average holding period abnormal return ŽAHPAR., the holding period return
ŽHPR. for each stock and the corresponding holding period return for the market ŽHPR M, t . are
calculated. HPR is calculated using the following formula:
k

j
k
HPR i s
ž Ł Ž1q R i ,t .
ts j / y1,

where jk HPR i s holding period return of stock i from day t s j to day t s k; R i,t s return of stock i
on day t. Similarly, the jk HPR M ,i Žcorresponding to stock i . over the same period is calculated by the
following formula:
k

j
k
HPR M ,i s
k
ž Ł Ž1q E Ž R i ,t .
ts j / y1,

where j HPR M ,i s holding period return of the market from day t s j to day t s k; EŽ R i,t . sexpected
rate of return on stock i at period. The buy-and-hold approach reduces the potential upward or
downward bias induced by cumulating single-period abnormal returns over long periods and gives an
unbiased representation of aggregate abnormal returns ŽRoll, 1983; Conrad and Kaul, 1993..
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 37

Table 2
Average abnormal returns and average holding period abnormal returns for the sample of rights issues
This table shows the average abnormal return ŽAAR. and the average holding period abnormal return
ŽAHPAR. for 51 days surrounding the announcements of 65 rights issues from the first quarter of 1988
to the second quarter of 1996. Day t s 0 is the announcement date of the rights issues. The Market
Model is used to estimate abnormal returns with the model parameters estimated over the period day
t sy200 to day t sy60. Correction for thin trading is done via the Scholes and Williams’s Ž1977.
methodology. The abnormal returns are aggregated over the period day t sy30 to t s 20 using the
buy-and-hold approach.
t
Day Ž t . AAR t Ž%. t-statistics y30 AHPAR t
Ž%. t-statistics
y30 y0.0734 y0.3054 y0.0734 y0.2578
y29 0.3562 1.6809 ) 0.2804 0.7408
y28 y0.1948 y0.9952 0.0867 0.1731
y27 y0.2005 y0.9735 y0.1159 y0.2065
y26 y0.1620 y0.7637 y0.2934 y0.5382
y25 0.0737 0.2909 y0.2346 y0.3727
y24 0.1320 0.4185 y0.1111 y0.1560
y23 0.0688 0.2896 y0.0609 y0.0765
y22 y0.0483 y0.1699 y0.1328 y0.1623
y21 y0.0206 y0.0607 y0.1983 y0.2398
y20 0.1582 0.8327 y0.0526 y0.0638
y19 y0.2303 y1.0149 y0.2952 y0.3384
y18 0.0454 0.2515 y0.2566 y0.2699
y17 y0.1125 y0.4805 y0.3612 y0.3569
y16 0.5512 1.2000 0.2363 0.1903
y15 y0.1955 y0.9755 0.0555 0.0420
y14 y0.1631 y0.6660 y0.1666 y0.1233
y13 y0.0898 y0.4965 y0.2897 y0.2124
y12 y0.2885 y1.2406 y0.5919 y0.4260
y11 y0.2246 y1.0841 y0.8694 y0.6471
y10 y0.1473 y0.5806 y1.0096 y0.7360
y9 0.2064 0.7667 y0.8588 y0.6199
y8 y0.1614 y0.6116 y1.0170 y0.7147
y7 0.6782 2.7661) ) ) y0.2719 y0.1774
y6 0.0734 0.3677 y0.1962 y0.1215
y5 y0.4726 y1.6018 y0.7204 y0.4410
y4 0.0697 0.3349 y0.7003 y0.4223
y3 y0.1621 y0.7314 y0.8432 y0.4811
y2 0.1974 0.6933 y0.7184 y0.3995
y1 0.3593 1.3735 y0.2900 y0.1523
0 1.6494 2.4167 ) ) 1.2853 0.6699
1 0.3265 0.7769 1.5788 0.8042
2 y0.1237 y0.4676 1.4287 0.7157
3 y0.2337 y1.2973 1.1583 0.5685
4 y0.0915 y0.3956 1.0588 0.5003
5 0.0359 0.1573 1.0593 0.4883
6 0.0045 0.0179 1.0602 0.4715
7 0.0622 0.3126 1.1186 0.4903
8 y0.3512 y1.4778 0.7836 0.3428

(continued on next page)

38 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

Table 2 Ž continued .
t
Day Ž t . AAR t Ž%. t-statistics y30 AHPAR t
Ž%. t-statistics
9 0.1162 0.3887 0.9076 0.3809
10 0.0378 0.1437 0.9414 0.3833
11 0.2212 1.1103 1.1301 0.4503
12 y0.2119 y1.0629 0.9107 0.3609
13 y0.3024 y1.2367 0.5617 0.2236
14 0.0051 0.0289 0.5093 0.2029
15 y0.1255 y0.8000 0.3112 0.1221
16 y0.0576 y0.2334 0.1427 0.0569
17 y0.0759 y0.1696 0.0395 0.0152
18 0.5670 1.8735 ) 0.6265 0.2360
19 0.2316 0.6620 0.8122 0.2985
20 0.0599 0.2650 0.8233 0.3028
) )) )))
, , and denote significance at the 10%, 5% and 1% levels, respectively Žtwo-tail t-tests..

where jk HPR i s holding period return of stock i from day t s j to day t s k,

k
j HPR M ,i s holding period return of the market from day t s j to day t s k
Žadjusted for systematic risk of stock i ., N s total number of rights issues or
private placements in each of the two samples.

4.2. Findings: Announcement effects of rights issues

The AAR and AHPAR series for the sample of rights issues are presented in
Table 2. The AHPAR for the 30 days before the announcement day are not
y1
significant Žy3 0 AHPARs y0.29% . These findings suggest that firms do not
.
time the announcements of rights issues to coincide with periods of overvaluation
for their shares. Our findings also imply that there is no information leakage prior
to the announcements of rights issues. Consequently, there is no evidence to
suggest that speculators are able to trade with superior information to achieve
abnormal returns.
The AAR for the announcement day is significantly positive at the 5% level
ŽAAR ts0 s 1.6494%.. To capture any information leakage just before the an-
nouncements of the rights issues and any delayed responses if the announcements
had been made after the close of the trading day, the 3-day AHPAR, y11 AHPAR,
is calculated Žfrom day t s y1 to day t s y1.. The y11 AHPAR of 2.34% is
statistically significant.
The positive abnormal returns provide evidence that rights issues in Singapore
are associated with Agood newsB. This result is consistent with observations of
positive abnormal returns surrounding rights issues in Switzerland, Korea and
Greece ŽLoderer and Zimmermann, 1988; Kang, 1990; Tsangarakis, 1996.. How-
ever, it is in contrast to findings of negative abnormal returns in the United States
ŽEckbo and Masulis, 1992..
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 39

Fig. 1. Average holding period abnormal returns for the sample of rights issues.

Fig. 1 plots the average holding period abnormal returns of the rights issues.
The announcement effects are concentrated between day t s y1 and day t s 1.
No significant share price increases can be detected for the period prior to the
announcement day and there are no delayed responses to the announcements of
rights issues. However, it is noted that the AHPAR on day t s 17 decreases to
0.04%. This could be due to the overreaction of the stock market to the
announcements of rights issues.

4.3. Findings: Announcement effects of priÕate placements

The AAR and AHPAR series for the sample of private placements are
presented in Table 3. The AHPAR for the period prior to the announcement date,
y1
y3 0 AHPAR, is significant at 8.63%. The presence of significantly positive AARs
prior to the announcement date lends support to Myers and Majluf’s Ž1984.
prediction that firms will sell seasoned equity issues after a period of share price
increases. However, another plausible explanation for these positive AARs is the
occurrence of information leakage prior to the announcement day. This may result
in speculative trading with superior information to achieve abnormal returns.
The AAR on the announcement date, AAR ts0 , is not statistically significant.
This suggests that information may have leaked before the formal announcement
of the private placement. To fully capture the announcement effects, the 21-day
AHPAR from day t s y20 to day t s 18 is calculated. It amounts to a significant

8
We also calculated the 3-day AHPAR Žday t sy1 to day t s1. and the 11-day AHPAR Žday
t sy10 to day t s1.. Both y11 AHPAR and y101 AHPAR are positive but not statistically significant.
40 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

Table 3
Average abnormal returns and average holding period abnormal returns for the sample of private
placements
This table shows the average abnormal return ŽAAR. and the average holding period abnormal return
ŽAHPAR. for 51 days surrounding the announcements of 67 private placements from the first quarter
of 1988 to the second quarter of 1996. Day t s 0 is the announcement date of the private placements.
The Market Model is used to estimate abnormal return with the model parameters estimated over the
period day t sy200 to day t sy60. Correction for thin trading is done via the Scholes and
Williams’s Ž1977. methodology. The abnormal returns are aggregated over the period day t sy30 to
t s 20 using the buy-and-hold approach.
t
Day Ž t . AAR t Ž%. t-statistics y30 AHPAR
Ž%. t-statistics
y30 y0.3031 y1.2725 y0.3031 y1.1100
y29 0.0193 0.0912 y0.2877 y0.6610
y28 0.0715 2.4928 ) ) 0.4049 0.6722
y27 0.0620 0.2050 0.4898 0.7015
y26 y0.3179 y0.9326 0.1686 0.2092
y25 0.1111 0.3673 0.2282 0.2759
y24 y0.0414 y0.1791 0.1674 0.1884
y23 y0.0391 y0.1084 0.1545 0.1461
y22 y0.0648 y0.1773 0.1073 0.0960
y21 0.4545 1.3735 0.5431 0.4627
y20 0.6204 1.4219 1.1806 0.8791
y19 0.0887 0.3758 1.2595 0.9389
y18 0.0468 0.2141 1.2786 0.9677
y17 0.5091 1.8682 ) 1.8602 1.2693
y16 0.8389 2.6698 ) ) ) 2.7739 1.7334 )
y15 0.3788 1.4332 3.2783 1.8563 )
y14 0.6773 1.7669 ) 4.0494 2.1028 ) )
y13 0.4649 1.3988 4.6601 2.2185 ) )
y12 y0.5551 y2.1737 ) ) 4.0419 1.8962 ) )
y11 0.8055 2.4735 ) ) 4.9516 2.2696 ) )
y10 0.4504 1.2465 5.5342 2.3709 ) )
y9 0.6751 1.9706 ) 6.3539 2.6432 ) ) )
y8 0.1163 0.4571 6.5419 2.6427 ) ) )
y7 0.7980 2.1976 ) ) 7.6177 2.8244 ) ) )
y6 0.4572 0.9812 8.2584 2.8507 ) ) )
y5 y0.4240 y1.5983 7.7847 2.6891) ) )
y4 0.1225 0.3317 7.8374 2.7439 ) ) )
y3 0.3856 1.0773 8.3412 2.8034 ) ) )
y2 0.3557 0.9871 8.6970 2.9204 ) ) )
y1 y0.0629 y0.2351 8.6276 2.8605 ) ) )
0 0.0410 0.0738 8.9580 2.6786 ) ) )
1 y0.4235 y1.3206 8.3757 2.5782 ) )
2 0.2688 0.8526 8.8104 2.5960 ) )
3 0.1491 0.5437 8.8154 2.6331) ) )
4 y0.4911 y1.7762 ) 8.0797 2.4583 ) )
5 y0.0500 y0.1730 7.7167 2.4542 ) )
6 0.0987 0.3077 7.9719 2.3789 ) )
7 0.0665 0.3495 7.9926 2.4178 ) )
8 y0.6077 y2.1341) ) 7.1081 2.2112 ) )
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 41

Table 3 Ž continued .
t
Day Ž t . AAR t Ž%. t-statistics y30 AHPAR
Ž%. t-statistics
9 y0.1720 y0.6163 6.8459 2.1278 ) )
10 y0.3252 y1.6982 ) 6.5187 1.9776 ) )
11 0.2454 1.1561 6.8964 2.0399 ) )
12 y0.0094 y0.0327 6.9061 1.9969 ) )
13 0.0758 0.2873 6.8151 1.9881) )
14 0.2804 0.7620 7.1023 2.0431) )
15 0.2207 0.7532 7.5323 2.0936 ) )
16 0.0572 0.2303 7.7162 2.1151) )
17 0.3183 0.9860 8.3607 2.1831) )
18 0.0894 0.2131 8.6734 2.1301) )
19 y1.0262 y3.0489 ) ) ) 7.5165 1.8208 ) )
20 0.1679 0.5708 7.6754 1.8218 ) )
) )) )))
, , and denote significance at the 10%, 5% and 1% levels, respectively Žtwo-tail t-tests..

6.27%. This is consistent with studies on private placements in the United States
and in Japan ŽWruck, 1989; Hertzel and Smith, 1993; Kato and Schallheim, 1993..
In Table 3, there are 12 positive and 8 negative AARs in the post-announce-
ment period. Four of the eight negative AARs are statistically significant ŽAAR ts4 ,
AAR ts8 , AAR ts10 and AAR ts19 ., while none of the positive AARs are signifi-
cant. One plausible explanation for the observation of significantly negative AARs
is that the market over-reacted to the announcements of private placements.

Fig. 2. Average holding period abnormal returns for the sample of private placements.
42 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

Another possible explanation is that there are profit taking transactions by

speculators who had traded on superior information before the announcement day.
Fig. 2 plots the average holding period abnormal returns of the private
placements. From these plots, the information leakage appears to occur from day
t s y22. In the post-announcement period, no run up in share prices is observed.

5. Multivariate analysis of announcement effects

5.1. Variables and hypotheses tested

The price pressure effects hypothesis is tested using two determinants of price
elasticity: namely liquidity and variance of stock returns.
Liquidity is defined as the ratio of the firm’s average daily trading volume from
t s y200 to t s 0, to the number of shares outstanding before the seasoned equity
issue ŽLIQ.. A firm with higher LIQ is assumed to have a flatter demand curve as
investors will demand lower compensation given the higher liquidity. We hypothe-
size that there will be a positive relationship between the liquidity of a stock ŽLIQ.
and the abnormal returns surrounding the announcements of rights issues and
private placements.
Variance of stock returns ŽVAR. is the variance of daily stock returns from day
t s y200 to t s 0. A higher VAR increases the compensation that investors
require in order to hold on to additional shares which are perceived to be riskier.
We hypothesize that there will be a negative relationship between the variance of
daily stock return ŽVAR. and the abnormal returns surrounding the announcements
of rights issues and private placements.
To test inÕestment opportunity effects, we calculated the size of the seasoned
issue by taking the natural logarithm of the ratio of the proceeds to the market
value of the firm on day t s y30 ŽLnProMV.. This methodology is in line with
Tsangarakis’ Ž1996. study.9 We hypothesize that there will be a positive relation-
ship between the size of issue ŽLnProMV. and the abnormal returns surrounding
the announcements of rights issues and private placements.
We introduce a dummy variable ŽINV. to denote the announcement of invest-
ment opportunities andror capital expenditure. INV is set equal to 1 when such
announcements are found. INV is set equal to 0 when the issuing firms announce
that the issuance proceeds will be used for repayment of debt or financing working
capital needs. We hypothesize that there will be a positive relationship between the
announcements of investment opportunities andror capital expenditure ŽINV. and
the abnormal returns surrounding announcements of rights issues and private
placements.

9
Tsangarakis Ž1996. used the ratio of the proceeds to the market value of the firm on day t sy30.
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 43

To test for wealth-transfer effects, we examine the change in the issuing firm’s
debt-to-equity ratio Ž D DE .. The debt-to-equity ratio of the firm is defined as the
total book value of short term and long term liabilities divided by the market value
of the firm on day t s y30. The market value of a firm is the product of the
share’s closing price on day t s y30 and the total number of outstanding shares
before the seasoned equity issue.10 We hypothesize that there will be a negative
relationship between the change in debt-to-equity ratio Ž D DE . and the abnormal
returns surrounding the announcements of rights issues and private placements.
To test the pricing effects in seasoned equity issues, we adopt the methodology
proposed by Heinkel and Schwartz Ž1986.. The pricing ŽPRC. is measured by the
ratio of the offer price to the closing price of the share on day t s y30. We
hypothesize that there will be a positive relationship between PRC and the
abnormal returns surrounding the announcements of rights issues and private
placements.
We test the information asymmetry effects only on the private placements
sample. The rights issues sample is not included because we assumed that the
ownership structure of the issuing firms is not changed. Following Hertzel and
Smith Ž1993., we use the book-to-market-equity ratio Ž BM . to measure the
potential for undervaluation. BM is the ratio of the book value of equity before the
seasoned equity issue to the market value of equity on day t s y30. It measures
the fraction of market equity that is attributed to tangible assets. A higher BM
shows that a greater proportion of the firm value is due to tangible assets.
Conversely, a lower BM reflects a firm value that is more dependent upon
intangible assets. The higher the value of intangible assets, the higher is the
potential for undervaluation. We hypothesize that there will be a negative relation-
ship between the BM and the abnormal returns surrounding the announcements of
private placements.
The ownership structure effects will be tested on the private placements sample
only because little ownership changes are expected in the rights issues sample. The
ownership structure effect is examined based on the level of ownership concentra-
tion which is measured by the combined shareholding of shareholders with greater
than 5% stake in the firm. No differentiation is made between directors, manage-
ment and outside shareholders. The change in the level of ownership concentration

10
The formula for measuring the change in debt-to-equity ratio is as follows:
Dy d Funds D
D DEs y ,
Eq Ž 1y d . Funds E
where Ds total book value of short term and long term liabilities; Es market value of the firm on
day t sy30; Fundss total funds raised from the seasoned equity issue; d s proportion of funds
proposed by the issuing firms for refinancing existing debt. This is a modification of Masulis and
Korwar’s Ž1986. methodology. Their formula includes the market value of preference shares in the
total market value of equity.
44 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

Ž DOL. will be the difference between the level of ownership concentration before
and after the private placement. We hypothesize that there will be a positive
relationship between the change in the level of ownership concentration Ž DOL.
and the abnormal returns surrounding the announcements of private placements.

5.2. Methodology

We jointly test for the above effects on the rights issues sample by using the
following multivariate regression equation:

Rights Ž y11 HPAR i . s E 0 q E 1 LIQ i q E 2VAR i q E 3 LnProMVi q E4 INVi

q E 5 D DEi q E6 PRC i q ´ i , Ž 2.
where RightsŽy11 HPAR i . is the 3-day holding period abnormal return from day
t s y1 to day t s 1 for stock i.
The joint-test for the private placement sample requires us to remove compen-
sation effects which may otherwise distort our analysis.11 This is done by
adjusting the abnormal returns for the number of shares issued as well as the
placement price. The regression equation used to test the announcement effects of
private placements is as follows:

Place Ž y210 AdjHPAR i . s E 0 q E 1 LIQ i q E 2VAR i q E 3 LnProMVi q E4 INVi

q E 5 D DEi q E6 PRC i q E 7 BMi q E 8 DOL i q ´ i ,

Ž 3.

where PlaceŽy210 AdjHPAR i . is the 21-day adjusted holding period abnormal

return from day t s 20 to day t s 1 for stock i.
The Pearson correlation matrix for the independent variables used in the
multivariate regression equations for rights issues and private placements are

11
Wruck Ž1989. adjusted the abnormal returns by taking into account the number of shares issued
and the issue price. Similarly, we adjusted the 21-day holding period abnormal returns using the
following formula:
1 pi Pi ,tsy30 y Pi
Place Ž y2 10 AdjHPAR i . s
½ 1yp i
Place Ž y201 HPAR i . q
ž 1yp i /ž Pi ,tsy30 /5 ,

where PlaceŽy2 01 HPAR i . s 21-day holding period abnormal return from day t sy20 to day t s1 for
stock i; p i s ratio of the number of shares issued to the existing number of shares after the private
placement for stock i; Pi,ty30 s closing price of stock i on day t sy30; Pi s private placement price
for stock i.
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 45

presented in Table 4, Panel A and Panel B, respectively. None of the bivariate

correlations exceeds the cut-off value of 0.52.
5.3. Findings: MultiÕariate analysis on rights issues
The multivariate regression results for rights issues are presented in Table 5.
The model explains 21.18% of the variation in the dependent variable. The
F-statistic of the equation is significant at the 5% level.

Table 4
Pearson correlation matrix of independent variables in the regression equations
This table presents the bivariate correlations between the independent variables used in regression Eqs.
Ž2. and Ž3. in Panel A and Panel B, respectively. All variables in Panel A have 65 data points. All
variables in Panel B have 67 data points except for variable DOL, which has 59 data points because of
insufficient data on the level of ownership concentration for eight firms. No bivariate correlation in
either set of variables is greater than 0.52.
Panel A: Rights issues
INV D DE LnProMV PRC VAR LIQ
INV 1.0000
D DE 0.3391 1.0000
LnProMV y0.1329 y0.4133 1.0000
PRC y0.1213 0.1728 0.0654 1.0000
VAR 0.1368 0.0700 y0.0061 y0.0518 1.0000
LIQ 0.2445 0.2365 0.0560 0.0362 y0.0237 1.0000

Panel B: Private placements

INV D DE LnProMV PRC VAR LIQ DOL BM
INV 1.0000
D DE 0.5052 1.0000
LnProMV y0.1531 y0.3222 1.0000
PRC y0.0132 y0.1363 0.4526 1.0000
VAR 0.0696 0.0624 y0.0054 0.0921 1.0000
LIQ 0.0984 0.0191 0.2063 0.1057 0.4319 1.0000
DOL y0.1465 y0.0227 y0.0368 y0.0777 0.1275 0.2682 1.0000
BM y0.1934 y0.5112 0.0937 y0.0168 y0.2765 y0.2383 y0.0418 1.0000

The variables are defined as follows:

INV: dummy variable set to 1 when firms simultaneously announce investment opportunities or capital
expenditure with announcement of seasoned equity issue. INV set to 0 if otherwise.
D DE: change in debt-to-equity ratio of the firm measured using the equation explained in footnote 10.
LnProvMV: natural logarithm of the ratio of proceeds from seasoned equity issue to the market value
of the firm on day t sy30.
PRC: ratio of the price of seasoned equity to the closing share price on day t sy30.
VAR: variance of daily stock returns from day t sy200 to day t s 0.
LIQ: ratio of the average daily trading volume Žfrom day t sy200 to day t s 0. to the existing
number of shares before the seasoned equity issue.
DOL: difference between the level of ownership concentration before and after the private placement.
BM: ratio of the book value of equity to the market value of equity on day t sy30.
 46
R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54
Table 5
Multivariate regression on the sample of rights issues
This table presents the results from regression Eq. Ž2.. The 3-day holding period abnormal return Žy11 HPAR. is regressed on the variables LIQ, VAR,
LnProMV, INV, D DE and PRC for the sample of rights issues. All variables have 65 data points. The 3-day holding period is from day t sy1 to day t s1.
The sample consists of 65 rights issues by 56 firms over the period from the first quarter of 1988 to the second quarter of 1996. The estimated coefficients and
the t-statistics Žin parentheses. of the variables are reported along with the R 2 , adjusted R 2 and the F-statistics of the regression.
RightsŽy11 HPAR i . s E 0 q E 1 LIQ i q E 2VAR i q E 3 LnProMVi q E4 INVi q E 5 D DEi q E6 PRC i q ´ i
E0 E1 E2 E3 E4 E5 E6
0.0395 y1.9811 y1.5076 0.0305 0.0234 y0.0261 0.0152
Ž0.906. Žy0.530. Žy0.467. Ž2.904 ) ) ) . Ž1.342 ) . Žy1.024. Ž0.334.

R 2 s 0.2118 F-statistic s 2.5971

Adjusted R 2 s 0.1302 Significance of F-statistic s 0.0268
) )) )))
, , and denote significance at the 10%, 5% and 1% levels, respectively, using one-tail tests. Refer to Table 4 for variable definitions.
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 47

The coefficients of the variables LIQ and VAR are both statistically insignifi-
cant. There is no evidence to support the existence of a downward-sloping demand
curve. The price pressure hypothesis is not supported. This result is consistent with
Tsangarakis Ž1986. but differs from Loderer et al. Ž1991..12
The variable LnProMV has a coefficient that is positive and statistically
significant at the 1% level. This implies that rights issues in Singapore are
associated with Agood newsB. The larger the scale of the rights issues, the more
positive are the news about the firm’s prospects. This result is in contrast to Miller
and Rock’s Ž1985. hypothesis that seasoned equity issues provide negative signals
about the firms’ earning prospects.
The coefficient of the dummy variable INV is positive and statistically signifi-
cant at the 10% level. This shows that the impact on share prices is positive when
firms announce investment opportunities or capital expenditure simultaneously
with rights issues.
The regression results for variables LnProMV and INV are evidence that rights
issues are associated with favorable earning prospects.
The coefficient of the variable D DE is not statistically significant. The result
does not support Kang’s Ž1990. and Dhatt et al.’s Ž1996. hypotheses of reduction
in financial distress or the hypothesis of wealth-transfer between shareholders and
bondholders.
The coefficient of the variable PRC is statistically insignificant. This suggests
that investors and existing shareholders are indifferent to the level of the rights
subscription price.

5.4. Findings: MultiÕariate analysis on priÕate placements

The multivariate regression results for private placements are presented in

Table 6. The regression equation is able to explain 23.03% of the variation in the
dependent variable. The F-statistic for the equation is significant at the 10% level.
The coefficients of the variables LIQ and VAR are not statistically significant.
As in the rights issue sample, we find no evidence supporting the price pressure
hypothesis.
The coefficients of the variables LnProMV and INV are statistically insignifi-
cant. The size of the issue and the simultaneous announcement of investment
opportunities have no impact on share prices. We find this result puzzling as we
expected results to be similar to the rights issue sample.
The coefficient of the variable D DE is statistically insignificant. Our finding
does not support the argument of reduction in financial distress as a result of

12
Our results for the price pressure hypothesis are directly comparable to those of Tsangarakis Ž1996.
and Loderer et al. Ž1991.. Their studies used determinants of price elasticity to test for the existence of
downward sloping demand curves.
 48
R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54
Table 6
Multivariate regression on the sample of private placements
This table presents the results from regression Eq. Ž3.. The 21-day holding period adjusted abnormal return Žy21 1 AdjHPAR. is regressed on the variables LIQ,
VAR, LnProMV, INV, D DE, PRC , BM and DOL for the sample of private placements. Except for variable DOL, all variables have 67 data points. There are
only 59 data points for variable DOL because of insufficient data on the level of ownership concentration for eight firms. The 21-day holding period is from
day t sy20 to day t s1. The sample consists of 67 private placements by 56 firms over the period from the first quarter of 1988 to the second quarter of
1996. The estimated coefficients and the t-statistics Žin parentheses. of the variables are reported along with the R 2 , adjusted R 2 and the F-statistics of the
regression.
Place Žy21 0 AdjHPAR i . s E 0 q E 1 LIQ i q E 2VAR i q E 3 LnProMVi q E4 INVi q E 5 D DEi q E6 PRC i q E 7 BMi q E 8 DOL i q ´ i
E0 E1 E2 E3 E4 E5 E6 E7 E8
y0.3044 11.6515 y88.6922 y0.0037 y0.0072 0.1035 0.2971 0.1200 y0.0401
Žy1.414. Ž0.983. Žy1.187. Žy0.065. Žy0.140. Ž0.270. Ž2.958 ) ) ) . Ž1.177. Žy0.139.

R 2 s 0.2303 F-statistic s1.8704

Adjusted R 2 s 0.1072 Significance of F-statistic s 0.0859
) )) )))
, , and denote significance at the 10%, 5% and 1% levels, respectively, using one-tail tests. Refer to Table 4 for variable definitions.
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 49

seasoned equity issues or the hypothesis of wealth-transfer between shareholders

and bondholders.
The coefficient of the variable PRC is positive and statistically significant at the
1% level. This implies that the price of private placement shares serves as a signal
of firm value. The positive coefficient of PRC suggests that a higher placement
price signals a higher firm value. One possible explanation is that private
placement shares are usually sold to institutions or high net worth individuals who
are deemed to have expertise in assessing firm value. Their willingness to
purchase the placement shares, which are usually sold at a premium, implies that
the issuing firms are worth more than their current market valuation.
The coefficient of the variable BM is statistically insignificant. Our finding
does not support Hertzel and Smith’s Ž1993. hypothesis that private placements
signal undervaluation.
The coefficient of the variable DOL is statistically insignificant. This suggests
that the change in the level of ownership concentration during private placements
is not an important determinant of firm value. This could be because the changes
in the level of ownership concentration in our sample of private placements are
relatively small. Hertzel and Smith Ž1993. also noted the relatively minute changes
to ownership concentration for their sample of private placements.

6. Multivariate analysis of private placement premium

We find that private placement shares are usually sold at a premium in

Singapore. Following Hertzel and Smith Ž1993., we analysed the premiums using
the following multivariate regression equation:
Premium i s l 0 q l1 LnProMVi q l 2 INVi q l3 D DEi q l 4 BMi

q l5 DOL i q ´ i , Ž 4.
where Premium i s premium on private placement shares of stock i.
The premium on the private placement shares is calculated as follows:
Pi y Pi ,tsy30
Premium i s , Ž 5.
Pi ,tsy30

where Pi,ty30 s closing price of stock i on day t s y30; Pi s price of the private
placement shares for stock i.
The regression results for the premium on private placement shares are
summarized in Table 7. The equation is able to explain 20.71% of the variation in
the dependent variable. The F-statistic of the equation is significant at the 5%
level.
 50
R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54
Table 7
Multivariate regression on the sample of private placement premiums
This table presents the results for regression Eq. Ž4.. The private placement premium ŽPremium. is regressed on the variables LnProMV, INV, D DE, PRC,
BM and DOL for the sample of private placements. The premium is calculated using Eq. Ž5.. The sample consists of 67 private placements by 56 firms over
the period from the first quarter of 1988 to the second quarter of 1996. Out of the 67 private placements, 51 were undertaken at a premium. Except for variable
DOL, all variables have 67 data points. There are only 59 data points for variable DOL because of insufficient data on the level of ownership concentration for
eight firms. The estimated coefficients and the t-statistics Žin parentheses. of the variables are reported along with the R 2 , adjusted R 2 and the F-statistics of
the regression.
Premium i s l 0 q l1 LnProMVi q l2 INVi q l3 D DEi q l4 BMi q l5 DOL i q ´ i
l0 l1 l2 l3 l4 l5
0.6567 0.2298 0.0382 y0.2088 y0.0557 y0.1633
Ž3.730 ) ) ) . Ž3.401) ) ) . Žy0.550. Žy0.399. Žy0.419. Žy0.434.

R 2 s 0.2071 F-statistic s 2.7677

Adjusted R 2 s 0.1322 Significance of F-statistic s 0.0271
) )) )))
, , denote significance at 10%, 5% and 1% levels, respectively, using one-tail tests. Refer to Table 4 for variable definitions.
 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54 51

Except for LnProMV, none of the independent variables is statistically signifi-

cant. The coefficient of LnProMV is positive and statistically significant at the 1%
level, which implies that when the capital requirement relative to the market value
of the firm is large, the premium on private placement shares is higher. This
suggests that the quantum of the capital requirement proxies for the attractiveness
of the investment opportunities available.

7. Comparison between rights issues and private placements

This paper documents several differences between rights issues and private
placements in Singapore.
Companies typically obtain a general mandate during the annual shareholder
meeting to issue seasoned equity through private placements, without the need to
seek for further approval when these issues are actually placed. Generally, the
regulatory requirements and issuance costs are lower for private placement. On the
other hand, companies are required to obtain both the approval of the shareholders
and the SGX and to promptly announce their intention to issue rights. However,
under the SGX continuing listing requirements, the number of new shares issued
through a private placement is restricted to 10% of the firm’s existing share
capital. Similar restriction is not generally placed on rights issues.13 As such, rights
issues tend to be of a larger dollar value than private placements. As private
placement shares are sold only to a selective group of sophisticated investors, this
may also limit the number of shares that can be issued. Companies have to
consider the trade-off between issue size and ease of issuance when choosing
between rights issues and private placements.
Rights are usually sold at a discount. Underpricing of rights does not disadvan-
tage the existing shareholders. However, any discount on private placement shares
will put existing shareholders at a disadvantage. The SGX continuing listing
requirements restrict the discount to 10% of the last transacted price.
In Singapore, however, private placement shares are usually sold at a premium.
One possible reason for the willingness of the investors to purchase private
placement shares at a premium is that they recognized the current undervaluation
of the firm. Another possible reason is that the investors may have difficulties
buying the shares in the amounts that they desire from the open market. In other
words, the low free float of issuing firms’ shares may have prevented the
purchasers from buying in the open market without affecting the share price
significantly. This is supported by the evidence of a significant positive association
between the size of the seasoned issue and the placement premium.

13
SGX only restricts the size of rights issues to 10% of the firm’s existing share capital when the
issuing firm does not have specific use for the capital raised.
52 R.S.K. Tan et al.r Pacific-Basin Finance Journal 10 (2002) 29–54

Information leakage prior to the announcement day is observed for private

placements but not for rights issues. This is attributed to the different definition of
announcement dates for private placements and rights issues as a result of SGX
regulatory requirements. The press release date of completed or ongoing private
placements is taken as the announcement day. In contrast, the announcement day
for rights issues corresponds to the intention of the issuing firms to undertake
rights issues.

8. Conclusion

This paper investigates the announcement effects of seasoned equity issues in

Singapore. We attempt to identify the factors behind the changes in firm value and
to test for the prevalence of several theories on seasoned equity issues. This is
done by a multivariate regression analysis on variables that reflect the character-
istics of the equity issues and the issuing firms.
Contrary to various hypotheses on the negative effects of seasoned equity
issues, we find significant positive announcement abnormal returns. This suggests
that seasoned equity issues in Singapore constitute favorable news about the
earnings prospects of issuing firms.
This paper finds that price pressure effects are not present in the Singapore
equity market. This implies that firms are able to issue a reasonable amount of
new shares without any significant adverse effects on their share prices. Our
findings also show that reducing financial distress is not a concern for these firms.
For rights issues, we find higher positive abnormal returns for firms that
undertake larger issues. The positive abnormal returns are reinforced when issuing
firms simultaneously announce investment opportunities andror capital expendi-
tures. The stock-price reaction during rights issues is not related to the level of the
subscription price. There is no support for Heinkel and Schwartz’s Ž1986. proposal
that the subscription price can serve as a signal of firm quality.
For private placements, we find that the price is an important determinant of
firm value. The abnormal returns are positively related to the placement price. A
higher placement price signals a higher firm value. Furthermore, our analysis of
private placement premium shows that the larger the equity issue, the higher the
private placement premium.
In addition, there is no support for the hypothesis that the changes in ownership
concentration is an important determinant of firm value during a private place-
ment.

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