Abstract
Primary equity issues provide an injection of funds from the sale of new shares prior
to stock exchange listing. Typically, new primary equity is publicly sourced via an initial
public offer (IPO). In Australia, however, a direct placement to private and institutional
shareholders may also be undertaken prior to flotation.
This dissertation begins with a review of the Australian institutional issuance
environment. The empirical analysis uses a sample of 1,351 Australian primary equity
raisings that listed between January 1983 and June 1995. In aggregate, these equity raisings
totalled A$30B (in 1997 constant dollars), having an average issue size of A$24.4M and
average flotation costs of 7.88%. Two formation decisions, relating to the demand for
underwriter services and choice of distribution method, are investigated. In each study, a
theoretical model is developed and tested using logit regression analysis.
In the context of the demand for underwriting services, transaction costs,
information asymmetry, risk transfer/avoidance and self-marketing hypotheses from the
financial intermediation literature are examined. Empirical results support the transaction
costs, liquidity and risk transfer/avoidance hypotheses, but not the information asymmetry
explanations.
The choice of primary equity distribution method is analogous to the public versus
private funding choice reported in the debt market literature, in which the source of funding
is related to transaction costs and information asymmetry hypotheses. This framework is
augmented by marketing risk and channel structure considerations, and by corporate
governance based research in the IPO literature that suggest the maintenance of private
control rights and preferences for a particular initial ownership structure, motivate
distribution choice. Support for transaction costs and marketing risk explanations is
identified in a reduced form model. Moreover, corporate governance considerations are
found to be important for small equity raisings.