Øyvind Norli

Handbook of Corporate Finance: Empirical Corporate Finance (B. Espen Eckbo)

This essay surveys the extant literature and adds to the empirical evidence on issuance activity,flotation costs, and valuation effects of security offerings. We focus primarily on public offerings of equity for cash, although we also review and present new evidence on debt offerings and private placements. The essay has four major parts: (1) We review aggregate issue activity in exchange listed securities from 1980 through 2004. Following the IPO, only about one-half of the publicly traded firms undertake a public security offering of any type, and only about one-quarter undertake a SEO. Thus, SEOs are relatively rare, which is consistent with adverse selection costs being an important consideration when raising cash externally. (2) We review the evidence on direct issue costs across security types and flotation methods, including the more recent SEO underpricing phenomenon. A large number of studies provide evidence on the determinants of underwriter compensation, and confirm the importance of variables capturing information asymmetries and underwriter competition. (3) We survey and interpret the valuation effects of security issue announcements. In the period since the Eckbo and Masulis (1995) survey, many studies examining announcement-period stock returns have focused on the effects of flotation method choice and foreign offerings. The well-known negative average announcement effect observed for U.S. SEOs appears to be a somewhat U.S.-specific phenomenon. (4) We review and extend evidence on the performance of issuing firms in the five year post-issue period. The literature proposes either a risk based-explanation or a behavioral explanation for the phenomenon of low average realized returns following IPOs and SEOs. Standard factor model regressions fail to reject the null that the low average returns are commensurate with issuers' risk exposures. Recent theoretical developments suggest that lower risk levels following equity issues may be linked to issuers' investment activity, a promising direction for future research.

Magma forskning og viten 9(3) s. 70-75

Journal of Corporate Finance 11(1-2) s. 1-35

Journal of Financial Economics 56(2) s. 251-291

European Finance Review 1 s. 265-287

Handelshøyskolen BI

This paper documents that stock liquidity improves shareholders’ incentive to monitor management. Using a hand-collected sample of contested proxy solicitations and shareholder proposals as occurrences of shareholder activism, we find that poor firm performance increases the probability of shareholder activism and that this relationship is much stronger for firms with liquid stock than for other firms. The conclusion that liquidity improves monitoring is robust to different measures of firm performance and liquidity. We also document that target shareholders earn positive abnormal returns on the announcement date of activism and conclude that shareholder activism creates shareholder value.

Corporate Governance Conference, Toulouse

Utah Winter Finance Conference

Praktisk Økonomi & Finans 23(3) s. 11-19

Journal of Applied Corporate Finance 18(3) s. 66-75

Norges Handelshøyskole

We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as longshots, as five-year buy-and-hold returns of 1,000 percent or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed low minus high (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leveragerelated macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

Norges Handelshøyskole

Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

Institutt for foretaksøkonomi. Norges handelshøyskole

Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game.

Norges Handelshøyskole

While there is no equilibrium framework for defining liquidity risk per se, several plausible arguments suggest that liquidity risk is pervasive and thus may be priced. For example, market frictions increase the cost of hedging strategies requiring frequent portfolio rebalancing. Also, liquidity risk is likely to play a role whenever the market declines and investors are prevented from hedging via short positions. Using monthly return data from 1963–2000, and a broad set of test assets, we examine six candidate factor representations of aggregate liquidity risk, and test whether any one of these are priced. The results are interesting. First, with the surprising exception of the recent measure proposed by Pastor and Stambaugh (2001), liquidity factor shocks induce co-movements in individual stocks’ liquidity measure (commonality in liquidity). The commonality is similar to that found in the extant literature (Chordia, Roll, and Subrahmanyam (2000)), which so far has been restricted to a single year of data. Second, again with the exception of the Pastor-Stambaugh measure, the liquidity factors receive statistically significant betas when added to the Fama-French model. Third, maximum-likelihood estimates of the risk premium are significant for the measure based on bid-ask spreads, contemporaneous turnover, as well as the Pastor-Stambaugh measure, which exploits price reversals following volume shocks. Overall, the simple-to-compute, "low-minus-high" turnover factor first proposed by Eckbo and Norli (2000) appears to do as least as well as the other factor measures.

Institutt for foretaksøkonomi. Norges handelshøyskole

The typical Nasdaq IPO stock underperforms the Nasdaq market index as well as non-IPO stocks matched on size and book-to-market ratio. We find that IPO firms have lower leverage ratios than the matched firms and exhibit lower exposure to leverage-related risk factors such as unexpected inflation and term spreads. Moreover, IPO firms have greater liquidity (turnover) that matched non-IPO stocks and receive lower expected returns in a factor model containing a liquidity risk factor introduced here. The factor models price IPO stocks within a rational, multifactor pricing framework. We also show that frequency of exchange delistings due to liquidations cannot explain the relatively low average IPO return realizations. The frequency of extreme positive (>=500%) return realizations is slightly greater than for non-IPO stocks. The additional "longshot" probability appears to reflect internal growth prospects as we show that IPO stocks are not acquired and delisted at a higher frequency than non-IPO Nasdaq firms.

Norges Handelshøyskole

It is well known that IPO stocks on average substantially underperform (over 3-5 years) non-IPO stocks matched on firm size. With a large sample of Nasdaq IPOs, this paper presents systematic evidence that IPO stocks are less risky than the size-matched firms and thus have lower expected return. We show that, in the years immediately following the issue, IPO stocks have lower leverage ratios and higher liquidity (turnover) than matched firms. A model with macroeconomic risk factors further reveals that IPO stocks have lower exposures than matched firms to leverage-related factors such as unexpected in ation and term-structure spreads. Moreover, when we introduce liquidity as a risk factor in a Fama-French type of model, we find that the liquidity factor also reduces expected returns to IPO stocks relative tomatched firms. Controlling for risk using either factor model, we cannot reject the hypothesis of zero abnormal returns to IPO stocks.

Institutt for foretaksøkonomi. Norges handelshøyskole

It is well known that IPO stocks on average substantially underperform (over 3-5 years) non-IPO stocks matched on firm size. With a large sample of Nasdaq IPOs, this paper presents systematic evidence that IPO stocks are less risky than the size-matched firms and thus have lower expected return. We show that, in the years immediately following the issue, IPO stocks have lower leverage ratios and higher liquidity (turnover) than matched firms. A model with macroeconomic risk factors further reveals that IPO stocks have lower exposures than matched firms to leverage-related factors such as unexpected in action and term-structure spreads. Moreover, when we introduce liquidity as a risk factor in a Fama-French type of model, we find that the liquidity factor also reduces expected returns to IPO stocks relative tomatched firms. Controlling for risk using either factor model, we cannot reject the hypothesis of zero abnormal returns to IPO stocks.

Annual Meetings of the Western Finance Association

The `new issues puzzle' is that stocks of common stock issuers subsequently underperform non-issuers matched on size and book-to-market ratio. With 7,000+ seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. As equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Also, equity issues signicantly increase stock liquidity (turnover) which also lowers expected returns relative to non-issuers. Our conclusions are robust to issue characteristics, to "decontamination" of factor portfolios, and to model specifications.

Annual Meetings of the American Finance Association

The `new issues puzzle' is that stocks of common stock issuers subsequently underperform non-issuers matched on size and book-to-market ratio. With 7,000+ seasoned equity and debt issues, we document that issuer underperformance reflects lower systematic risk exposure for issuing firms relative to the matches. As equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Also, equity issues signicantly increase stock liquidity (turnover) which also lowers expected returns relative to non-issuers. Our conclusions are robust to issue characteristics, to "decontamination" of factor portfolios, and to model specifications.

utenTitteltekst

The `new issues puzzle' is that stocks of common stock issuers subsequently underperform non-issuers matched on size and book-to-market ratio. With 7,000+ seasoned equity and debt issues, we document that issuer underperformance re ects lower systematic risk exposure for issuing firms relative to the matches. As equity issuers lower leverage, their exposures to unexpected inflation and default risks decrease, thus decreasing their stocks' expected returns relative to matched firms. Also, equity issues signicantly increase stock liquidity (turnover) which also lowers expected returns relative to non-issuers. Our conclusions are robust to issue characteristics, to "decontamination" of factor portfolios, and to model specifications.