Primary equity formation in Australia

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.