The Effect of Shareholder Approval of Equity Issuances Around the World

• DOI: http://doi.org/10.1111/jacf.12328
• Author: Clifford G. Holderness
• Date: 01 March 2019
• Published date: 01 March 2019

IN THIS ISSUE:

Agency

Capitalism

8The Rise of Agency Capitalism and the Role of Shareholder

Activists in Making It Work

Ronald J. Gilson, Columbia and Stanford Law Schools, and

Jeffrey N. Gordon, Columbia Law School

23 e Eect of Shareholder Approval of Equity Issuances

Around the World

Clifford G. Holderness, Boston College

42 Does Mandatory Shareholder Voting Prevent Bad Acquisitions?

e Case of the United Kingdom

Marco Becht, Université libre de Bruxelles, CEPR, and ECGI; Andrea Polo, Luiss University,

Universitat Pompeu Fabra, EIEF, Barcelona GSE, CEPR and ECGI; and Stefano Rossi, Bocconi

University, CEPR, and ECGI

62 e Early Returns to International Hedge Fund Activism: 2000-2010

Marco Becht, Université libre de Bruxelles, CEPR, and ECG; Julian Franks, London Business

School, CEPR, and ECGI; Jeremy Grant, Berenberg Bank; and Hannes Wagner, Bocconi University,

ECGI, and IGIER

81 How Has Takeover Competition Changed Over Time?

Tingting Liu, Iowa State College, and Harold Mulherin, University of Georgia

95 Do Large Blockholders Reduce Risk?

David Newton and Imants Paeglis, Concordia University

113 Estimating the Equity Risk Premium and Expected Equity Rates

of Return: e Case of Canada

Laurence Booth, University of Toronto

126 Save the Buyback, Save Jobs

Greg Milano and Michael Chew, Fortuna Advisors

VOLUME 31

NUMBER 1

WINTER 2019

APPLIED

CORPORATE FINANCE

Journal of

23

Journal of Applied Corporate Finance • Volume 31 Number 1 Winter 2019

I

In a study published recently in the Journal of Financial

Economics, I show that widespread dierences in shareholder

approval—dierences that have been overlooked by academic

studies to date—are associated with two remarkably consistent

empirical regularities. First, shareholder-approved issuances

are associated with announcement returns that are both posi-

tive—on average 2%—and higher than those associated with

“managerial issuances,” which experience an average return

of negative 2%. is dierence in market response holds

both across and within countries for each of the three major

ways that public companies raise equity: public oers, rights

oers, and private placements. Second, when companies issue

equity in countries where shareholder approval is required,

rights oers are far more common than public oers. But

in those countries where managers may issue equity with-

out shareholder approval, public oers are far more common

than rights oers. When viewed in aggregate, these empirical

regularities suggest that conicts of interest between manag-

ers and shareholders—known as “agency conicts” to law and

economics scholars—play a major if not the dominant role in

how companies choose to issue equity, a conclusion which,

as discussed below, is at odds with most academic research.

e divide between shareholder-approved and managerial

stock issuances oers new insights into many regularities that

would otherwise seem puzzling. For example, many studies

have attempted to explain why public oerings of equity

predominate in the United States even though the resulting

announcement eect is typically negative. is puzzling situa-

tion characterizes only three of the other 23 countries that I

studied.¹ One is Canada, where the market reaction is -2.04%;

the other two are Israel (-4.26%) and Japan (-1.17%). As it

turns out, these four are the only countries in which managers

may broadly issue stock without shareholder approval. In all of

the other 19 countries where shareholder approval is required,

either public oerings are rare, or the average announcement

eect is positive, or both. For example, the average announce-

ment eect for public oers is positive in all countries where

shareholder approval is required; in Hong Kong it is 3.14%;

in Taiwan, 1.74%; and in the United Kingdom, 1.19%.

Shareholder approval also oers new insights into rights

oers. e announcement eects are negative and large in

some countries, among them Australia (-3.53%) and the

Netherlands (-2.17%), but positive and equally large in

other countries, among them Finland (4.29%) and Singapore

(3.69%). I am unaware of any eort to reconcile these diver-

gent ndings. In Australia and the Netherlands, managers

may unilaterally undertake rights oers, but in Finland and

Singapore they must obtain shareholder approval.

Mandatory shareholder approval also oers new insights

on the third major way that corporations issue equity: private

placements. For instance, in Sweden (7.27%) and India

1 The papers showing the results noted in the Introduction are found in Table 2 of

the original JFE article. When multiple papers use the same method of issuance in the

same country, I calculate an average return weighted by the number of observations in

each study. These gures are reported in Table 2 of this article.

by Clifford G. Holderness, Boston College*

n the United States and a few other countries, management typically needs only

the approval of its board of directors to issue common stock. In most countries,

however, by law or stock exchange rule, shareholders must vote to approve equity issu-

ances when using certain methods or contemplating offers that exceed a specied fraction of

outstanding shares. And in some countries, shareholders must approve all equity issuances.

Even in the United States, shareholder approval is mandatory under certain circumstances.

e Eect of Shareholder Approval of Equity

Issuances Around the World

*This a shorter, less technical version of my article, “Equity Issuances and Agency

Costs: The Telling Story of Shareholder Approval Around the World,” Journal of Financial

Economics, Vol. 129 (2018), pp. 415-439. This research has been supported by Norg-

es Bank.