Stock price reactions to capital structure changes in Chilean firms: Examining the effects of ownership structure, growth opportunities and leverage
Main Article Content
Keywords
Abnormal returns, Debt, Capital structure, Wealth expropriation
Abstract
We analyzed the effects of ownership structure, capital structure and growth opportunities on stock price reactions when companies issued debt or equity.
Our results, based on event study methodology and IV regressions from a sample of 70 Chilean firms, indicate that controlling shareholder ownership has a negative effect on stock price reactions for debt issuances and a positive effect for equity issuance. These results indicate that debt issuances are a substitute for majority shareholder monitoring, and that equity issuances are associated with superior corporate performance. Equity issuances are a means for expropriating wealth from non-controlling shareholders. Debt and growth opportunities have a non-linear effect.
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References
Ambarish, R., John, K. & Williams, L. (1987). Efficient Signaling with Dividends and Investments. The Journal of Finance, 42(2), 321-344. https://doi.org/10.1111/j.1540-6261.1987.tb02570.x
Ang, J., Cole, R. & Lin, J. (2000). Agency costs and ownership structure. The Journal of Finance, 55(1), 81-106. https://doi.org/10.1111/0022-1082.00201
Armitage, S. (2002). Do Underwriters Certify Value? Evidence from UK Rights Issues and Open Offers. Journal of Business Finance & Accounting, 29(9-10), 1239 1273. https://doi.org/10.1111/1468-5957.00468
Armitage, S. (2010). Block Buying and Choice of Issue Method in UK Seasoned Equity Offers. Journal of Business Finance & Accounting, 37(3-4), 422-447. https://doi.org/10.1111/j.1468-5957.2010.02188.x
Asquith, P. & Mullins, D. (1986). Equity issues and offering dilution. Journal of Financial Economics, 15(1-2), 61- 89. https://doi.org/10.1016/0304-405X(86)90050-4
Baker, M. & Wurgler, J. (2002). Market timing and capital structure. The Journal of Finance, 57(1), 1-32. https://doi.org/10.1111/1540-6261.00414
Barnes, E. & Walker, M. (2006). The Seasoned-Equity Issues of UK Firms: Market Reaction and Issuance Method Choice. Journal of Business Finance & Accounting, 33(1-2), 45-78. https://doi.org/10.1111/j.1468-5957.2006.01354.x
Bayless, S. & Chaplinsky, M. (1996). Is there a window of opportunity for seasoned equity issuance? The Journal of Finance, 51(1), 253-278. https://doi.org/10.1111/j.1540-6261.1996.tb05209.x
Brown, S. & Warner, J. (1985). Using Daily Stock Returns: The Case of Event Studies. Journal of Financial Economics, 14(1), 3-31. https://doi.org/10.1016/0304 405X(85)90042-X
Burton, B., Lonie, A. & Power, D. (2000). The impact of corporate growth opportunities on the market response to new equity announcement. Applied Financial Economics, 10(1), 27-36. https://doi.org/10.1080/096031000331897
Cai, J. & Zhang, Z. (2011). Leverage Change, Debt Overhang and Stock Prices. Journal of Corporate Finance,17(3), 391-402. https://doi.org/10.1016/j.jcorpfin.2010.12.003
Castillo, A. (2004). The announcement effect of bond and equity issues: evidence from Chile. Estudios de Economía, 31(2), 177-205.
Céspedes, J., González, M. & Molina, C. (2010). Ownership and capital structure in Latin America. Journal of Business Research, 63(3), 248-254. https://doi.org/10.1016/j.jbusres.2009.03.010
Chen, P. & Shehu, E. (2009). Stock Price Reaction to Announcements of Capital Structure Changes–from an Industry Leverage Ratio Perspective. Sweden: Lund University.
Chong, A. & López de Silanes, F. (2007). Corporate governance in Latin America. Inter-America Development Bank. Working Paper N.° 591. https://doi.org/10.2139/ssrn.1820067
Chung, K., Wright, P. & Charoenwong, C. (1998). Investment opportunities and market reaction to capital expenditure decision. Journal of Banking & Finance, 22(1), 41-60. https://doi.org/10.1016/S0378-4266(97)00021-6
Cooney, J. & Kalay, A. (1993). Positive Information from Equity Issue Announcement. Journal of Financial Economics, 33(2), 149-172. https://doi.org/10.1016/0304 405X(93)90002-S
Corrado, C. (1989). A Nonparametric Test for Abnormal Security-Price Performance in Event Studies. Journal of Financial Economics, 23(2), 385-395. https://doi.org/10.1016/0304-405X(89)90064-0
Corrado, C. & Zivney, T. (1992). The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns. Journal of Financial and Quantitative Analysis, 27(3), 465-478. https://doi.org/10.2307/2331331
De Medeiros, O. & Matsumoto, A. (2005). Brazilian market reaction to equity issue announcements. Revista de Administração Contemporânea, 9(2), 36-46. https://doi.org/10.1590/S1415-65552005000600004
Demsetz, H. & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155-1177. https://doi.org/10.1086/261354
Denis, D. (1994). Investment opportunities and the market reaction to equity offerings. Journal of Financial and Quantitative Analysis, 29(2), 159-177. https://doi.org/10.2307/2331220
Dierkens, N. (1991). Information asymmetry and equity issues. Journal of Financial and Quantitative Analysis, 26(2), 181-199. https://doi.org/10.2307/2331264
Eckbo, B. & Masulis, R. (1992). Adverse selection and the rights offer paradox. Journal of Financial Economics, 32(3), 293-322. https://doi.org/10.1016/0304 405X(92)90030-2
Fleming, G., Heaney, R. & McCosker, R. (2005). Agency costs and ownership structure in Australia. Pacific-Basin Finance Journal, 13(1), 29-52. https://doi.org/10.1016/j.pacfin.2004.04.001
Gombola M., Lee, H. & Liu, F. (1998). Further Evidence on Insider Selling Prior to Seasoned Equity Offering Announcements: The Role of Growth Opportunities. Journal of Business, Finance and Accounting, 26(5-6), 621-649. https://doi.org/10.1111/1468-5957.00269
Harris, M., & Raviv, A. (1990). Capital structure and the informational role of debt. The Journal of Finance, 45(2), 321-349. https://doi.org/10.1111/j.1540-6261.1990.tb03693.x
Healy, P. & Palepu, K. (1990). Earnings and Risk Changes Surrounding Primary Stock Offers. Journal of Accounting Research, 28(1), pp. 25-48. https://doi.org/10.2307/2491216
Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
Jensen, M. & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jensen, M., Crutchley, C. & Hudson, C. (1994). Market reaction to equity offer reasons: What information do managers reveal? Journal of Economics & Finance, 18(3), 313-329. https://doi.org/10.1007/BF02920490
Leal, R., & Amaral, A. (2000). Um momento para o insider trading: o período anterior ao anúncio de uma emissão pública de ações. In Leal, R., Costa Jr. N., Lemgruber, E.F. (org). Finanças Corporativas (pp.158-173). Coleção Coppead de Administração.
Leland, H. & Pyle, D. (1977). Informational asymmetries, financial structure, and financial intermediation. The Journal of Finance, 32(2), 371-387. https://doi.org/10.2307/2326770
Lipson, M. & Mortal, S. (2009). Liquidity and capital structure. Journal of Financial Markets, 12(4), 611-644. https://doi.org/10.1016/j.finmar.2009.04.002
Liu, J., Akbar, S., Ali Shah, S., Zhang, D. & Pang, D. (2016). Market reaction to seasoned offerings in China. Journal of Business Finance & Accounting, 43(5-6), 597 653. https://doi.org/10.1111/jbfa.12198
Lucas, D. & McDonald, R. (1990). Equity issues and stock price dynamics. The Journal of Finance, 45(4), 1019-1043. https://doi.org/10.1111/j.15406261.1990.tb02425.x
MacKinlay, A. (1997). Event Studies in Economics and Finance. Journal of Economic Literature, 35(1), 13-39.
Masulis, R. (1980). The effects of capital structure change on security prices: A study of exchange offers. Journal of Financial Economics, 8(2), pp. 139-178. https://doi.org/10.1016/0304-405X(80)90015-X
Masulis, R. & Korwar, A. (1986). Seasoned equity offerings: An empirical investigation. Journal of Financial Economics, 15(1-2), 91-118. https://doi.org/10.1016/0304-405X(86)90051-6
McLaughlin, R., Safieddine, A. & Vasudevan, G. (1998). The information content of corporate offerings of seasoned securities: an empirical analysis. Financial Management, 27(2), 31-45.
Mikkelson, W. & Partch, M. (1986). Valuation effects of security offerings and the issuance process. Journal of Financial Economics, 15(1-2), 31-60. https://doi.org/10.1016/0304-405X(86)90049-8
Mitto, U. (1996). The Bad News Bearers. Canadian Investment Review, 7(4), 23-27.
Modigliani, F. & Miller, M. (1958). The cost of capital, corporate finance, and theory of investment. American Economic Review, 48(3), 655-669.
Modigliani, F. & Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433-443.
Myers, S. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0
Myers, S. & Majluf, N. (1984). Corporate financing and investment decisions when firms have information the investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Pilotte, E. (1992). Growth Opportunities and the Stock Price Response to New Financing. The Journal of Business, 65(3), 371-394. https://doi.org/10.1086/296576
Quyhn-Nhu, D. (2009). Leverage, Growth Opportunities and Stock Price Response to New Financing. International Journal of Business and Management, 4(9), 35-49. https://doi.org/10.5539/ijbm.v4n9p35
Rajan, R. & Zingales, L. (1995). What do we know about capital structure: some evidence from international data. The Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Raymar, S. (1993). The Financing and Investment of a Levered Firm under Asymmetric Information. The Journal of Financial Research, 16(4), 321-336. https://doi.org/10.1111/j.1475-6803.1993.tb00151.x
Ross, S. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. The Bell Journal of Economics, 8(1), 23-40. https://doi.org/10.2307/3003485
Saens, R. (1999). Premia in Emerging Market ADR Prices: Evidence from Chile. Abante, 2(1), 51-70.
Smith, C., & Watts, R. (1992). The Investment Opportunities Set and Corporate Financing, Dividend and Compensation Policies. Journal of Financial Economics, 32(3), 263-292. https://doi.org/10.1016/0304-405X(92)90029-W
Vithessonthi, C. (2008a). The Short-Run Performance of Initial Public Offerings: An Empirical Study for Thailand. The Business Review, 9(2), 48-54.
Vithessonthi, C. (2008b). What Explains Stock Market Reactions to Proposals to Increase the Authorized Common Stock? Journal of International Finance and Economics, 8(1), 126-136.
Vithessonthi, C. (2008c). Stock Price Performance of Initial Public Offerings: The Thai Experience. Journal of International Finance and Economics, 8(2), 30-43.
Welch, I. (2004). Capital Structure and Stock Returns. Journal of Political Economy, 112(1), 106-131. https://doi.org/10.1086/379933
Ang, J., Cole, R. & Lin, J. (2000). Agency costs and ownership structure. The Journal of Finance, 55(1), 81-106. https://doi.org/10.1111/0022-1082.00201
Armitage, S. (2002). Do Underwriters Certify Value? Evidence from UK Rights Issues and Open Offers. Journal of Business Finance & Accounting, 29(9-10), 1239 1273. https://doi.org/10.1111/1468-5957.00468
Armitage, S. (2010). Block Buying and Choice of Issue Method in UK Seasoned Equity Offers. Journal of Business Finance & Accounting, 37(3-4), 422-447. https://doi.org/10.1111/j.1468-5957.2010.02188.x
Asquith, P. & Mullins, D. (1986). Equity issues and offering dilution. Journal of Financial Economics, 15(1-2), 61- 89. https://doi.org/10.1016/0304-405X(86)90050-4
Baker, M. & Wurgler, J. (2002). Market timing and capital structure. The Journal of Finance, 57(1), 1-32. https://doi.org/10.1111/1540-6261.00414
Barnes, E. & Walker, M. (2006). The Seasoned-Equity Issues of UK Firms: Market Reaction and Issuance Method Choice. Journal of Business Finance & Accounting, 33(1-2), 45-78. https://doi.org/10.1111/j.1468-5957.2006.01354.x
Bayless, S. & Chaplinsky, M. (1996). Is there a window of opportunity for seasoned equity issuance? The Journal of Finance, 51(1), 253-278. https://doi.org/10.1111/j.1540-6261.1996.tb05209.x
Brown, S. & Warner, J. (1985). Using Daily Stock Returns: The Case of Event Studies. Journal of Financial Economics, 14(1), 3-31. https://doi.org/10.1016/0304 405X(85)90042-X
Burton, B., Lonie, A. & Power, D. (2000). The impact of corporate growth opportunities on the market response to new equity announcement. Applied Financial Economics, 10(1), 27-36. https://doi.org/10.1080/096031000331897
Cai, J. & Zhang, Z. (2011). Leverage Change, Debt Overhang and Stock Prices. Journal of Corporate Finance,17(3), 391-402. https://doi.org/10.1016/j.jcorpfin.2010.12.003
Castillo, A. (2004). The announcement effect of bond and equity issues: evidence from Chile. Estudios de Economía, 31(2), 177-205.
Céspedes, J., González, M. & Molina, C. (2010). Ownership and capital structure in Latin America. Journal of Business Research, 63(3), 248-254. https://doi.org/10.1016/j.jbusres.2009.03.010
Chen, P. & Shehu, E. (2009). Stock Price Reaction to Announcements of Capital Structure Changes–from an Industry Leverage Ratio Perspective. Sweden: Lund University.
Chong, A. & López de Silanes, F. (2007). Corporate governance in Latin America. Inter-America Development Bank. Working Paper N.° 591. https://doi.org/10.2139/ssrn.1820067
Chung, K., Wright, P. & Charoenwong, C. (1998). Investment opportunities and market reaction to capital expenditure decision. Journal of Banking & Finance, 22(1), 41-60. https://doi.org/10.1016/S0378-4266(97)00021-6
Cooney, J. & Kalay, A. (1993). Positive Information from Equity Issue Announcement. Journal of Financial Economics, 33(2), 149-172. https://doi.org/10.1016/0304 405X(93)90002-S
Corrado, C. (1989). A Nonparametric Test for Abnormal Security-Price Performance in Event Studies. Journal of Financial Economics, 23(2), 385-395. https://doi.org/10.1016/0304-405X(89)90064-0
Corrado, C. & Zivney, T. (1992). The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns. Journal of Financial and Quantitative Analysis, 27(3), 465-478. https://doi.org/10.2307/2331331
De Medeiros, O. & Matsumoto, A. (2005). Brazilian market reaction to equity issue announcements. Revista de Administração Contemporânea, 9(2), 36-46. https://doi.org/10.1590/S1415-65552005000600004
Demsetz, H. & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155-1177. https://doi.org/10.1086/261354
Denis, D. (1994). Investment opportunities and the market reaction to equity offerings. Journal of Financial and Quantitative Analysis, 29(2), 159-177. https://doi.org/10.2307/2331220
Dierkens, N. (1991). Information asymmetry and equity issues. Journal of Financial and Quantitative Analysis, 26(2), 181-199. https://doi.org/10.2307/2331264
Eckbo, B. & Masulis, R. (1992). Adverse selection and the rights offer paradox. Journal of Financial Economics, 32(3), 293-322. https://doi.org/10.1016/0304 405X(92)90030-2
Fleming, G., Heaney, R. & McCosker, R. (2005). Agency costs and ownership structure in Australia. Pacific-Basin Finance Journal, 13(1), 29-52. https://doi.org/10.1016/j.pacfin.2004.04.001
Gombola M., Lee, H. & Liu, F. (1998). Further Evidence on Insider Selling Prior to Seasoned Equity Offering Announcements: The Role of Growth Opportunities. Journal of Business, Finance and Accounting, 26(5-6), 621-649. https://doi.org/10.1111/1468-5957.00269
Harris, M., & Raviv, A. (1990). Capital structure and the informational role of debt. The Journal of Finance, 45(2), 321-349. https://doi.org/10.1111/j.1540-6261.1990.tb03693.x
Healy, P. & Palepu, K. (1990). Earnings and Risk Changes Surrounding Primary Stock Offers. Journal of Accounting Research, 28(1), pp. 25-48. https://doi.org/10.2307/2491216
Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
Jensen, M. & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jensen, M., Crutchley, C. & Hudson, C. (1994). Market reaction to equity offer reasons: What information do managers reveal? Journal of Economics & Finance, 18(3), 313-329. https://doi.org/10.1007/BF02920490
Leal, R., & Amaral, A. (2000). Um momento para o insider trading: o período anterior ao anúncio de uma emissão pública de ações. In Leal, R., Costa Jr. N., Lemgruber, E.F. (org). Finanças Corporativas (pp.158-173). Coleção Coppead de Administração.
Leland, H. & Pyle, D. (1977). Informational asymmetries, financial structure, and financial intermediation. The Journal of Finance, 32(2), 371-387. https://doi.org/10.2307/2326770
Lipson, M. & Mortal, S. (2009). Liquidity and capital structure. Journal of Financial Markets, 12(4), 611-644. https://doi.org/10.1016/j.finmar.2009.04.002
Liu, J., Akbar, S., Ali Shah, S., Zhang, D. & Pang, D. (2016). Market reaction to seasoned offerings in China. Journal of Business Finance & Accounting, 43(5-6), 597 653. https://doi.org/10.1111/jbfa.12198
Lucas, D. & McDonald, R. (1990). Equity issues and stock price dynamics. The Journal of Finance, 45(4), 1019-1043. https://doi.org/10.1111/j.15406261.1990.tb02425.x
MacKinlay, A. (1997). Event Studies in Economics and Finance. Journal of Economic Literature, 35(1), 13-39.
Masulis, R. (1980). The effects of capital structure change on security prices: A study of exchange offers. Journal of Financial Economics, 8(2), pp. 139-178. https://doi.org/10.1016/0304-405X(80)90015-X
Masulis, R. & Korwar, A. (1986). Seasoned equity offerings: An empirical investigation. Journal of Financial Economics, 15(1-2), 91-118. https://doi.org/10.1016/0304-405X(86)90051-6
McLaughlin, R., Safieddine, A. & Vasudevan, G. (1998). The information content of corporate offerings of seasoned securities: an empirical analysis. Financial Management, 27(2), 31-45.
Mikkelson, W. & Partch, M. (1986). Valuation effects of security offerings and the issuance process. Journal of Financial Economics, 15(1-2), 31-60. https://doi.org/10.1016/0304-405X(86)90049-8
Mitto, U. (1996). The Bad News Bearers. Canadian Investment Review, 7(4), 23-27.
Modigliani, F. & Miller, M. (1958). The cost of capital, corporate finance, and theory of investment. American Economic Review, 48(3), 655-669.
Modigliani, F. & Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433-443.
Myers, S. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0
Myers, S. & Majluf, N. (1984). Corporate financing and investment decisions when firms have information the investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Pilotte, E. (1992). Growth Opportunities and the Stock Price Response to New Financing. The Journal of Business, 65(3), 371-394. https://doi.org/10.1086/296576
Quyhn-Nhu, D. (2009). Leverage, Growth Opportunities and Stock Price Response to New Financing. International Journal of Business and Management, 4(9), 35-49. https://doi.org/10.5539/ijbm.v4n9p35
Rajan, R. & Zingales, L. (1995). What do we know about capital structure: some evidence from international data. The Journal of Finance, 50(5), 1421-1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Raymar, S. (1993). The Financing and Investment of a Levered Firm under Asymmetric Information. The Journal of Financial Research, 16(4), 321-336. https://doi.org/10.1111/j.1475-6803.1993.tb00151.x
Ross, S. (1977). The Determination of Financial Structure: The Incentive-Signalling Approach. The Bell Journal of Economics, 8(1), 23-40. https://doi.org/10.2307/3003485
Saens, R. (1999). Premia in Emerging Market ADR Prices: Evidence from Chile. Abante, 2(1), 51-70.
Smith, C., & Watts, R. (1992). The Investment Opportunities Set and Corporate Financing, Dividend and Compensation Policies. Journal of Financial Economics, 32(3), 263-292. https://doi.org/10.1016/0304-405X(92)90029-W
Vithessonthi, C. (2008a). The Short-Run Performance of Initial Public Offerings: An Empirical Study for Thailand. The Business Review, 9(2), 48-54.
Vithessonthi, C. (2008b). What Explains Stock Market Reactions to Proposals to Increase the Authorized Common Stock? Journal of International Finance and Economics, 8(1), 126-136.
Vithessonthi, C. (2008c). Stock Price Performance of Initial Public Offerings: The Thai Experience. Journal of International Finance and Economics, 8(2), 30-43.
Welch, I. (2004). Capital Structure and Stock Returns. Journal of Political Economy, 112(1), 106-131. https://doi.org/10.1086/379933