Three Essays on Equity Financing in the UK

This thesis consists of three essays on equity financing by UK firms, focusing primarily on Private Placement (PPs). PPs have dominated the Seasoned Equity Offering (SEO) landscape in the UK since 2000, whereas Rights Issues had done so previously. While the SEOs have traditionally been the preserve of large firms, in the UK, this has changed in the past decade. The Alternative Investment Market (AIM), with light touch, self-regulated equity market provisions has been the facilitating factor. Since firms issuing PPs are often financially constrained, it is puzzling that institutional investors participate. Chapter 2 provides an answer to this puzzle by investigating the misvaluation, growth prospects, underpricing and use of proceeds of PP firms. Results show that firms engaging inPPs are undervalued, belong to undervalued sectors and have higher growth prospects than firms making public offers. These aspects and deep discounts make them attractive to sophisticated investors despite being resource constrained. Short run undervaluation is associated with significant post-issue increases in total assets and capital expenditures whilst growth prospects positively impact R&D. In Chapter 3 short and long term market reactions are evaluated. The market reaction to private placements is nearly 3% as measured by cumulative abnormal returns five days around the issue date. The long term reaction, measured by buy-and-hold abnormal returns over three years post-issue, is insignificant. Chapter 4 investigates the impact on leverage of frequent equity issuers. We find 65% of UK firms have repeatedly issued equity during 1995-2015 and have higher leverage ratios than single issuers, implying that proceeds are not used to reduce debt. There is no significant difference in the cash flow sensitivity of debt and cash holdings between multiple and single issuers. Differences appear when we take into consideration the market the firm is listed (AIMversus main market).