What do equity issuances signal? A study of equity issuances in the UK before and during the financial crisis

The financial crisis provides an ideal setting to study how quality signalling by firms, and information asymmetries, might explain the stock price reactions around seasoned equity offerings. The heightened information asymmetry levels during the GFC should have increased the importance of issuance quality and information asymmetries in explaining announcement returns. However, we document new and, in some cases, surprising findings, using a sample of 700 UK seasoned equity offerings between 2003 and 2012: (1) Contrary to expectations, announcement returns during the crisis were driven less by signalling and asymmetric information effects and more by macroeconomic conditions and general uncertainty. (2) In constrained capital markets, firms that were able to move more quickly to raise significant amounts of capital, made the capital-raising environment more challenging for firms that followed, such that the latter had to incur additional costs. (3) Contrary to the traditional view that the low book-to-market ratios may proxy for overvaluation and thus lower announcement returns, we found a negative relationship during the crisis period. The latter is consistent with the view that book-to-market ratios may also proxy for a distressed firm effect which may have dominated the conventional ‘market timing’ effect during the GFC. (4) Announcement returns were strongly positive for many firms at the peak of the crisis, possibly because the market was relieved to see that equity issues might potentially save firms from insolvency; an equity issuance could, in such circumstances, be a positive signal, even though equity issues are conventionally seen as negative signals. Overall, our paper documents fresh and surprising results about equity capital-raising during the GFC, and also offers insights for corporate finance that are of interest beyond the current crisis.