MARKET REACTION TO RIGHTS OFFERING ANNOUNCEMENTS IN THE TURKISH STOCK MARKET A THESIS SUBMITTED TO THE GRADUATE SCHOOL OF APPLIED MATHEMATICS OF MIDDLE EAST TECHNICAL UNIVERSITY BY METE TEPE IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN FINANCIAL MATHEMATICS JANUARY 2012 Approval of the thesis: MARKET REACTION TO RIGHTS OFFERING ANNOUNCEMENTS IN THE TURKISH STOCK MARKET submitted by METE TEPE in partial fulfillment of the requirements for the degree of Master of Science in Department of Financial Mathematics, Middle East Technical University by, Prof. Dr. Ersan Akyıldız ____________ Director, Graduate School of Applied Mathematics Assoc. Prof. Dr. Ömür Uğur ____________ Head of Department, Financial Mathematics Assist. Prof. Dr. Seza Danışoğlu ____________ Supervisor, Department of Business Administration, METU Examining Committee Members: Prof. Dr. Gerhard-Wilhelm Weber ____________ Department of Financial Mathematics, METU Assist. Prof. Dr. Seza Danışoğlu ____________ Department of Business Administration, METU Prof. Dr. Zehra Nuray Güner ____________ Department of Business Administration, METU Assoc. Prof. Dr. Azize Hayfavi ____________ Department of Financial Mathematics, METU Assoc. Prof. Dr. Zeynep Önder ____________ Department of Management, Bilkent University Date: ____________ I hereby declare that all information in this document has been obtained and presented in accordance with academic rules and ethical conduct. I also declare that, as required by these rules and conduct, I have fully cited and referenced all material and results that are not original to this work. Name, Last Name : METE TEPE Signature : iii ABSTRACT MARKET REACTION TO RIGHTS OFFERING ANNOUNCEMENTS IN THE TURKISH STOCK MARKET Tepe, Mete M.Sc., Department of Financial Mathematics Supervisor : Assist. Prof. Dr. Seza Danışoğlu January 2012, 64 pages This study examines the market reaction to rights offering announcements in Turkey. Even though the topic is extensively studied in the finance literature, there is still research going on for emerging markets. The first part of this study measures market reaction to rights offering announcements for six different information arrival dates. The results are significantly negative except for the case of the announcement of the rights offering period. Additionally, the sample is divided into two sub-periods as before and after the 2001 crisis. The results show that there is a significant difference in market reaction and this difference is attributed to the change in economic policy after the 2001 crisis. The second part of the study examines the determinants of this market reaction and the findings suggest that bonus issues are positively related and there is also evidence that firms time their equity issues. The third part analyzes the long term performance of equity issuing firms in two subgroups as financial and non-financial firms. The results provide evidence of a negative performance and this finding is consistent with the results of previous studies. Keywords: Rights Offering, Seasoned Equity Offering, Pecking Order Theory, Information Asymmetry, Event Study iv ÖZ TÜRK HĐSSE SENEDĐ PĐYASASINDA RÜÇHAN HAKKI KULLANIMI DUYURULARINDA OLUŞAN PĐYASA TEPKĐSĐ Tepe, Mete Yüksek Lisans, Finansal Matematik Bölümü Tez Yöneticisi : Yrd. Doç. Dr. Seza Danışoğlu Ocak 2012, 64 Sayfa Bu çalışma ĐMKB’deki rüçhan hakkı duyurularına piyasanın verdiği tepkiyi incelemektedir. Bu konu finans literatüründe geniş ölçüde çalışılmış olsa da gelişmekte olan piyasalardaki araştırmalar hala devam etmektedir. Rüçhan hakkı sürecinde altı farklı olay günü mevcuttur. Bu olaylardan her birinde piyasaya bilgi ulaşır. Bu çalışmanın ilk bölümünde bu altı farklı olay günündeki piyasa tepkisi ölçülmüştür. Sonuçlar, bu tepkilerin, biri haricinde olumsuz olduğunu göstermiştir. Buna ek olarak, örneklem 2001 krizi öncesi ve sonrası olmak üzere iki alt gruba bölünmüştür. Sonuçlar, bu iki alt grup arasında istatistiksel olarak anlamlı bir fark olduğunu ortaya koymuştur. Bu fark, 2001 krizinden sonra hükümetin izlemiş olduğu ekonomik politikaya dayandırılmıştır. Çalışmanın ikinci kısmında ise piyasa tepkisinin belirleyicileri incelenmiştir. Bulgular, bedelsiz sermaye artırımı ile birlikte yapılan rüçhan hakkı duyurularının market tepkisi ile pozitif bir ilişkide olduğunu ve şirketlerin rüçhan hakkı duyurularında zamanlama yaptığını göstermiştir. Üçüncü kısımda sermaye artırımına giden firmalar finansal ve finansal olmayan olmak üzere iki alt gruba bölünmüştür ve literatürle tutarlı biçimde uzun vadeli performanslarının olumsuz olduğunu ortaya konmuştur. Anahtar Kelimeler: Rüçhan Hakkı, Đkincil Halka Arzlar, Hiyerarşi Teorisi, Bilgi Asimetrisi, Olay Çalışması v To my family vi ACKNOWLEDGMENTS It is my responsibility to thank all the people who have directly or indirectly contributed to the preparation of this study. I am more than grateful to my thesis advisor Assist. Prof. Dr. Seza Danışoğlu who not only supported and motivated me throughout the preparation process of this thesis but also mentored me and made invaluable contributions to my academic career. I would like to thank Prof. Dr. Nuray Güner who helped me like an unofficial co-advisor in many problems that I encountered in this thesis. I, again, would like to thank Assist. Prof. Dr. Seza Danışoğlu and Prof. Dr. Nuray Güner for devoting their time and effort to provide me with the data. I also have to thank Đnci Esen Kılıçkaya who helped me with the data collection procedure. Special thanks to TUBITAK (Scientific and Technological Research Council of Turkey) which supported me financially in my graduate education. It would be impossible without this financial support to embody this thesis. Its role in the development of science and technology in Turkey is precious not only for me but also for the other members of the society. Lastly, I would like to thank my family and all my friends in the Financial Mathematics Department who motivated me during hard times in the preparation of this thesis. vii TABLE OF CONTENTS ABSTRACT ............................................................................................................. iv ÖZ ........................................................................................................................ v ACKNOWLEDGMENTS ............................................................................................ vii TABLE OF CONTENTS ............................................................................................ viii LIST OF TABLES ...................................................................................................... x LIST OF FIGURES ................................................................................................... xi CHAPTERS 1. INTRODUCTION ................................................................................................. 1 1.1 Capital Needs of Firms ................................................................................. 1 1.2 Capital Structure and Related Theories .......................................................... 1 1.3 Pecking Order Theory and Turkey ................................................................. 2 1.4 Possible Explanatory Variables of Market Reaction ........................................... 4 1.4.1 Issue Size ........................................................................................... 4 1.4.2 Debt Ratio .......................................................................................... 5 1.4.3 Firm’s Stock Volatility ........................................................................... 5 1.4.4 Abnormal Stock Return Before the Issue................................................. 6 1.4.5 Market Return before the Issue ............................................................. 6 1.4.6 Simultaneous Bonus Issues and Dividend after the Issue .......................... 6 1.4.7 Issue Frequency .................................................................................. 7 1.4.8 Unsold Rights ...................................................................................... 7 1.5 Content, Extent and the Motivation of the Study ............................................. 7 2. LITERATURE REVIEW .......................................................................................... 9 2.1 Literature Review for Market Reaction............................................................ 9 2.2 Literature Review for Determinants of Market Reaction ................................... 13 2.3 Literature Review for Long-Run Stock Performance of Equity Issuing Firms ....... 16 3. DATA AND METHODOLOGY ................................................................................. 17 3.1 Rules and Regulations for Seasoned Equity Offerings ...................................... 17 3.2 Data Sources and Event Days ...................................................................... 19 viii 3.3 Data Description ........................................................................................ 21 3.4 Short-Term Market Reaction ........................................................................ 22 3.4.1 Event Study Methodology .................................................................... 22 3.4.2 Model Selection .................................................................................. 26 3.4.3 Construction of Hypotheses .................................................................. 29 3.4.4 Hypothesis Testing .............................................................................. 29 3.4.5 Estimating the Parameters of the Market Model ...................................... 31 3.5 Determinants of Market Reaction ................................................................. 31 3.5.1 Regression Analysis ............................................................................ 35 3.6 Measuring Long-Run Stock Performance ....................................................... 36 3.6.1 Biases and Methodology for Long-Horizon Event Studies .......................... 36 3.6.2 A Bayesian Approach to Measure Abnormal Return ................................. 38 3.6.3 Model Construction for Long-Run Abnormal Returns ................................ 41 3.6.4 A Similar yet Simpler Method ............................................................... 47 4. RESULTS AND ANALYSIS .................................................................................... 48 4.1 Short-Term Market Reaction ........................................................................ 49 4.2 Determinants of Market Reaction ................................................................. 53 4.3 Long-Horizon Abnormal Returns ................................................................... 56 4.4 Summing up the Results ............................................................................. 58 5. CONCLUSION .................................................................................................... 60 REFERENCES ........................................................................................................ 62 ix LIST OF TABLES TABLES Table 1 Data Sources for Event Days ........................................................................................... 17 Table 2 Data Sources for Company and Issue Variables .............................................................. 17 Table 3 Number of Rights Offerings By Year .............................................................................. 18 Table 4 Descriptive Statistics of Some Determinants ................................................................... 19 Table 5 Some Characteristics of Firms in the Sample .................................................................. 19 Table 6 Descriptive Statistics for the Number of Days between Announcements of the Same Firm ....................................................................................................................................................... 25 Table 7 Determinants Used for Each Event Day .......................................................................... 34 Table 8 Numerical Example Data for Griddy Gibbs Sampling .................................................... 39 Table 9 Average Abnormal Returns and Results of t-test ............................................................. 48 Table 10 Median Abnormal Returns and Results of Sign Test ..................................................... 49 Table 11 Mean difference test applied to sub-periods 1994-2001 and 2002-2011 ....................... 51 Table 12 Median difference test applied to sub-periods 1994-2001 and 2002-2011 .................... 51 Table 13 Regression Results for the Determinants of Market Reaction ....................................... 54 Table 14 Average Long-Horizon Abnormal Returns and Results of t-test ................................... 56 Table 15 Median Long-Horizon Abnormal Returns and Results of Sign Test ............................. 56 Table 16 Results of Abnormal Return Tests without beta change and covariance matrix ............ 57 x