4: Share purchase plans in Australia: issuer characteristics and valuation implications.(Report)

Abstract:

Share purchase plans (SPPs) are of Jered exclusively to a company's registered shareholders, who may purchase up to $5,000 worth of shares in a 12-month period at a discount to the market price and without any brokerage charge. They have become one of the most frequently used mechanisms for raising publicly traded equity capital in Australia, yet little is known about them from a financial markets' perspective. We address this deficiency by documenting the characteristics of Australian firms that have adopted SPPs and assessing their short-term and long-term valuation implications. We find that SPPs are more likely to be issued by firms with lower levels of liquidity and relatively large numbers of shareholders. They have a negative announcement effect, which is associated with the size of the issue, the prior share-price runup, the issue-price discount, the firm's industry, and whether there is enough time for non-shareholders to buy shares in order to participate. Long-run underperformance is also found over extended periods, consistent with much of the seasoned equity offering (SEO) literature. The SPP-issuer did not perform as badly if it was in the mining industry, if it was audited by a 'Big-N' firm, or if the issue was underwritten. Conversely, the greater the issue discount, the worse the issuer's long-run performance.

Keywords:

SHARE PURCHASE PLANS; SEASONED EQUITY OFFERING; UNDERPERFORMANCE.

1. Introduction

We investigate three aspects of share purchase plans [hereafter SPPs]: (1) the characteristics of firms that issue shares via SPPs; (2) how share prices behave around the time of an SPP announcement; and, (3) the long-term investment performance of firms that implement an SPP. Apart from our own work, (1) no research has been published on SPPs so far.

SPPs are a form of seasoned equity offering (SEO). The first Australian issue via an SPP was undertaken by CSR in 1991 when it offered shareholders the opportunity to subscribe for new shares worth $2,400 (The Intelligent Investor 2005). Following regulatory changes in September 2002 that allowed for subscriptions up to a maximum of $5,000 per shareholder (the prior cap was $3,000), the popularity of SPPs has increased substantially. (2)