This article is an attempt to review the research results of the seasoned equity offerings (SEO) in the empirical literature. It addresses the widely known SEO phenomena observed in different countries such as announcement effect – negative price reaction to SEO announcement, underpricing of seasoned equity and long-run underperformance of issuing company.
The article contains the data on negative price reaction to SEO announcement and also prescribes the hypotheses explaining this effect: the downward slopping demand curve hypothesis, capital structure hypothesis, transaction cost hypothesis and information hypothesis. The article provides the evidence of the impact of the following factors on announcement effect: the use of proceeds, information releases, equity issue volume, phases of the business cycle, cumulative abnormal stock performance and size of the issue. The article analyses the findings of the study of SEO discounting and the change in average SEO discounts over time as well as the impact of such as factors like exchange of issue, underwriter reputation contained in the academic literature. It also addresses the following hypotheses explaining SEO discount pattern: changing issuer composition hypothesis, leaving a good taste hypothesis, the short-selling hypothesis, increased investment banking power hypothesis. Authors also consider the worldwide phenomenon of long-run underperformance of issuing companies. The article also states various hypotheses that explain this pattern: windows of opportunities and manifestation of misspecified model.
Because of the lack of data on cash flows, it is impossible to use traditional measures of return such as IRR and TVPI for evaluation the performance of private equity funds in emerging markets.
In this study, we proposed an approach based on the use of adjusted rates of return for the PE funds, which can be implemented without the use of data on cash flows and net assets of the funds. The proposed indicators can be calculated on the basis of the publicly available data on portfolio transactions of the fund.
The study was presented methodology based on the performance of private equity portfolio transactions as well as the analysis of empirical data on a sample of 1957 deals in BRIC countries from 2000 to 2012.
The results of the empirical analysis largely support a number of fundamental characteristics of the PE funds, previously identified for the developed capital markets such as:
1. Private equity deals in developing countries are more risky assets than traditional instruments.
2. The return on the majority of transactions is below the return of the stock market, however, the most successful are significantly ahead of the market.
3. Coefficient β of buyout funds is less than one, indicating the low exposure to systemic risk.
Some characteristics were confirmed only in part:
1. The investments of venture capital funds have a coefficient β is greater than one for the markets of Brazil and India, and less than one for Russia and China.
2. Return on investment is higher for buyout funds than for venture capital funds in Russia and China. In India and Brazil - the opposite result.
The rest of the characteristics are fundamentally different from the identified in the developed capital markets:
1. The period of ownership for the private equity fund investment in developing countries is less than for developed countries and is an average of 3.3 years.
The size effect still remains one of the mysteries of capital markets. This effect assumes that common shares of small-sized companies tend to provide a higher average return compared with an average return of large-sized companies. It was first discovered by Banz (1981) during the test of asset pricing model (CAPM) in the U.S. market. The discovery led to further investigation of the issue in U.S. capital market and other developed and developing capital markets. However, until now in the scientific community there is no consensus about the real presence of this effect in capital markets and its magnitude.
Despite it, the size premium is actively used in the practice of companies, funds and individual analysts for valuation of the cost of equity. Most of them use premiums of such reports as Valuation Handbook –- Guide to Cost of Capital (former Ibbotson SBBI Classic Yearbook) published by Morningstar, Inc. In addition to instable presence of the size effect, it should be noted that information presented in this report are based on data of the U.S. capital market and, consequently, should be adjusted before the implementation for companies from other capital markets.
This paper presents an overview of studies devoted to analysis of the size effect on developed and developing capital markets. We systematized and summarized different approaches of assessing the size premiums, compared the obtained empirical results and summarized possible explanations for this effect. In this study we also identified the features under the analysis of the size effect, as well as discussed causes of the appearance of the effect, in general, in capital markets and its further disappearance in several countries.