Equity issuance and share price performance on the Johannesburg Stock Exchange

Abstract

A rights issue is a term used to describe the process of providing existing shareholders with a preferential option to purchase shares in proportion to their holding of existing shares. This enables publicly traded companies to raise funding for further development, without taking on more debt. When companies implement a rights issue, share prices tend to react to both the announcement and the rights issue event itself. The purpose of the research was to determine the effect on share returns for these two events. An event study methodology using 12-factor abnormal return estimates was conducted. A bootstrap analysis of cumulative abnormal returns was used to determine statistical significance. The research was conducted on companies who initiated and completed a rights issue on the Johannesburg Stock Exchange between 2005 to 2022. Approximately 150 companies were categorized according to the relative size of the rights issue (a function of the capital raised and the market cap of the company); their core business functionality (resource vs. non-resource); and value vs. growth companies (if applicable). The results indicate that the share price reduces to below the 5th percentile after the occurrence of a rights issue announcement and remains below the 5th percentile for 30 days after the announcement. Conversely, share prices increase beyond the 95th percentile once the rights issue event itself has occurred. The research also indicates that the relative size of the rights issue does not affect the magnitude of the cumulative abnormal returns for either the announcement or the rights issue event itself. Finally, resource companies are more severely influenced by rights issue activities (the announcement date and the rights issue) when compared to nonresource companies, whilst growth companies are more negatively influenced than value companies according to the announcement date; and value companies are more negatively affected according to the rights issue. These findings have implications for investors.