Public placements of seasoned equity issues in Japan

In sharp contrast to results of empirical tests investigating the U.S. market, the announcement of a seasoned equity issue by Japanese firms causes stock prices to increase. A major institutional difference between the two markets involves the underwriting process through which the offer price is set. In the U.S., the offer price is typically set less than 24 hours before the stock is sold to the public. Offer prices in Japan, however, are announced a median of seven trading days before the end of the subscription period and is set at substantial discount below the current stock price. In addition, there are two ways to determine the offering prices, the fixed price method and the formula price method. The underwriters' certification hypothesis fits nicely under this institutional environment because fixed price issues offer more certification. Average announcement effect for firms using the fixed price method is positive, while the announcement effect is zero for the firms using the formula price method. In addition, after controlling for offering method, a significant negative correlation is found between the announcement day return and the discount. We also examine abnormal returns around the subscription period and issue day

Underwriter Certification and Japanese Seasoned Equity Issues

In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification. Copyright 2003, Oxford University Press.