Seasoned Equity Offerings and Institutional Behaviour A Fully Integrated Market?

Seasoned Equity Offerings and Institutional Behaviour A Fully Integrated Market? Adri De Ridder a and Jonas Råsbrant b This version: May 2007 a Gotland University, SE-621 67 Visby, Sweden; e-mail: adri.deridder@hgo.se b Stockholm University, School of Business, SE-106 91 Stockholm, Sweden; e-mail: jrt@fek.su.se Abstract This paper examines institutional trading around rights issues in Sweden over the sample period 2000 to 2006. Using a unique database of complete stock ownership in firms with rights issues, we find that the magnitude of the announcement effect is negatively related to the level of institutional ownership over the initial announcement period and is consistent with the argument that the information gathering activities by institutional investors reduce information asymmetries. We find that ownership structure changes after a rights issue. More specifically, we find that domestic individuals reduce their holdings and that domestic institutional investors increase by the roughly the same magnitude. We also document that firms with rights issues among, and also experiencing the greatest increase in institutional holdings surrounding the offering outperformed their benchmark portfolio in the year following the offering relative to those firms with greatest reductions in institutional holdings. Moreover, this stock-picking ability is more pronounced for domestic compared to overseas institutional investors.

Abstract This paper examines institutional trading around rights issues in Sweden over the sample period 2000 to 2006. Using a unique database of complete stock ownership in firms with rights issues, we find that the magnitude of the announcement effect is negatively related to the level of institutional ownership over the initial announcement period and is consistent with the argument that the information gathering activities by institutional investors reduce information asymmetries. We find that ownership structure changes after a rights issue. More specifically, we find that domestic individuals reduce their holdings and that domestic institutional investors increase by the roughly the same magnitude. We also document that firms with rights issues among, and also experiencing the greatest increase in institutional holdings surrounding the offering outperformed their benchmark portfolio in the year following the offering relative to those firms with greatest reductions in institutional holdings. Moreover, this stock-picking ability is more pronounced for domestic compared to overseas institutional investors. 2

1 Introduction This paper examines whether rights issues by Swedish firms are accompanied by changes in ownership structure and if different institutional shareholders have different preferences to these offerings. More specifically, our objective is to examine if overseas institutional investors behave differently compared to investors located in the firm s country of origin. Despite the fact that seasoned equity offerings (SEOs) have been analyzed from several dimensions, empirical oriented studies relating offerings to changes in ownership structure are rare as access to and the quality of appropriate data is difficult to obtain. An early study by Loderer and Sheenan (1992) documents that the number of shareholders increases but that the concentration of ownership decreases after a SEO. Szewczyk et al. (1991) document that the announcement effect of a SEO is negatively related to the level of institutional ownership, and Kothare (1997) shows that rights offerings lead to a more concentrated ownership but also that liquidity in the stock, measured by bid-ask spreads, increases following the offering. A limited number of studies have analyzed holdings and behaviour by insiders. One of these studies, Ching et al. (2006), examines insider trading surrounding SEOs in Hong Kong and documents that insiders reduce their holdings in the six-month periods surrounding the rights issue. Similar findings are also reported by Gombola et al. (1997). The impact of an increased bid-ask spread on firm valuation is important as the higher expected return demanded by investors, to compensate for the bid-ask spread, implies a lower firm value as argued by Amihud and Mendelson (1986). Furthermore, ownership structure and trading in the stock can also influence the spreads in the stock as well as the relationship between spreads and ownership, see Holmstrom and Tirole (1993), Benston and Hagerman (1974) and Chiang and Venkatesh (1988). In other words, information of equity offerings and changes in ownership structure seems to be related. This paper takes a thorough look into SEOs, and addresses the following three research questions for a sample of rights issues in Sweden over the sample period 2000 to 2006. What is the announcement effect of a rights issue? Is the announcement effect correlated to the ownership structure? Does the ownership structure change following a rights issue and does it also vary among institutional investors and domiciles? To the best of our knowledge, we are the first to address and answer these questions as we have access to a unique dataset which provides us with the complete ownership structure for our sample firms. Prior empirical literature shows that stock prices on average fall when firms announce SEOs and have been attributed to the signalling effect (when sales by better-informed 3

investors signal that they believe the share is overpriced, see Leland and Pyle, 1977), agency problems (when managers increase their private benefits on behalf of the firms shareholders, see Jensen, 1986), and adverse selection. The adverse selection costs are commonly explained by the Myers and Majluf (1984) argument of lemons among shareholders investors realize that managers in firms have superior information and that they use this to time equity issues when the shares are overpriced. Investors realise this and interpret the announcement as bad news and revise their estimates of stock downwards (see, e.g., Asquith and Mullins, 1986; Masulis and Korwar, 1986; Mikkelsen and Partch, 1986; and Kim and Purnanandam, 2006). The general drop in stock prices surrounding the initial announcement of a SEO, seems also to be the case in the long run as documented by Loughran and Ritter (1997), Lee (1997), Eckbo (2000), Jegadeesh (2000), Brav et al. (2000), and Mitchell and Stafford (2000). However, even if SEO-firms on average underperform, some outperform their benchmarks (see Gibson et al., 2004). Hence, one aspect which we analyze in detail is whether different institutional investors have an ability to identify outperforming firms with SEOs and thereby obtaining a superior return and also if there is a difference between the domiciles of institutional investors. In addition, as prior studies report inconclusive findings about institutional investors ability to obtain a superior return (see Lakonishok et al., 1992; Shleifer and Vishny, 1992; Grinblatt and Titman, 1993), more empirical findings seem to be appropriate. 1 One distinctive feature of equity offerings in Sweden is the legal framework as the existing shareholders have the rights to participate in the offerings. 2 Thus, the corporate governance system is designed to protect the smaller shareholders to avoid dilution of ownership. Furthermore, equity offerings in Sweden can be characterized as rights issues where the rights only have a value if the subscription price is lower than the market price of the stock. This paper is closely related to Gibson et al. (2004), who demonstrate that firms with the largest increase in institutional shareholdings also outperformed their benchmark in the year following the offering compared to firms with the largest decrease in institutional shareholdings. By using a unique dataset, comprising of all rights issues on the Stockholm Stock Exchange during the sample period 2000 to 2006 together with complete information of 1 The issue whether active portfolio management generates a superior return in the initial public offering (IPO) markets has been examined by Hanley and Wilhelm (1995), Field (1995) and Krigman et al. (1999). In summary, these studies report that holding varies across IPOs but also that institutions exhibit a stock picking ability. 2 An approval of a shareholders meeting, with at least two-thirds of the votes, is required for the offering. In some cases an offering can be directed to a specific shareholder, hence dilution of ownership will follow. 4

ownership in these firms, we are in a position to provide new and innovative insights in the process when companies raise equity. Our study thereby complements previous analyses of SEOs. More specifically, we begin our analysis by examining the announcement effects of rights issues in Sweden. We then model the announcement effect to ownership structure. One feature of this analysis is that we introduce the concept of domiciles of institutional investors. Thus, our data permits us to identify if there is a difference in the announcement effect and different degrees of domestic and overseas ownership levels. We then proceed to analyze ownership levels and changes in ownership levels following rights issues across investors where we also control for firms specific variables. The foundation of this study is access to a unique data set reflecting the complete ownership structure of all firms listed on the Stockholm Stock Exchange. In contrast to many other countries, all public listed firms in Sweden are by law forced to have a complete record of the firm s ownership structure which is compiled by one body, the Nordic Central Securities Depositary (NCSD). In addition to data of holdings, an organization code is also attached which enables us to classify the shareholder into one of seven different groups. Holdings by overseas investors reflect in most cases holdings by a custodian bank, in other words, holdings by overseas investors can reflect several individuals as well as several patrons and be recorded as one overseas shareholder. For domestic individuals, we obtain a social security number which enables us to identify the age and sex. As previously mentioned, seasoned equity offerings in Sweden differ from the offerings in the U.S., as the main principle is that the newly issued shares first should be offered to the existing shareholders. 3 Thus, one important feature of the Swedish corporate governance system is to avoid dilution effects among the current shareholders. As our data enables us to identify holdings by each institution and individual, before and after the offer, we are also in a position to quantify changes in ownership levels for various investors, and where we control for firm specific variables (market capitalization value of equity and relative size of the offering). We find that the magnitude of the announcement effect is negatively related to the level of institutional ownership over the initial announcement period and is consistent with the argument that the information gathering activities by institutional investors reduce information asymmetries. We find that ownership structure changes after a rights issue. More specifically, we find that domestic individuals reduce their holdings and that domestic 3 For an international review of seasoned equity offerings and seasoned public offerings see Eckbo and Masulis (1995). 5

institutional investors increase by the roughly the same magnitude. We also document that firms with rights issues among, and also experiencing the greatest increase in institutional holdings surrounding the offering outperformed their benchmark portfolio in the year following the offering relative to those firms with greatest reductions in institutional holdings. Finally, this stock-picking ability is more pronounced for domestic compared to overseas institutional investors. The remainder of the paper is as follows. Section 2 provides a description of the data sources and methodology in detail. Section 3 reports our results. The final section summarizes our analysis and discusses some implications of our results. 2 Sample Period, Data and Methodology 2.1 Sample Period and Data Our dataset consists of firms with a rights issue on the Stockholm Stock Exchange (OMX) between 2000 and 2006. We obtain data from several sources. Through the computerized information system Affärsdata together with information from the market surveillance department at the Stockholm Stock Exchange, we identified a total sample of 174 rights issues over the sample period. The initial announcement date is obtained from multiple sources. Initially, we use Affärsdata to identify the announcement date. If no date was identified in this system, we proceed with screening daily newspapers and the firm s homepage to identify the announcement date. For some firms we obtained the announcement date directly from the firm. We lost some observations mainly due to lack of a precise announcement date; announcement dates which also include other stock sensitive information; multiple announcements within the window period; a time series of stock prices; and firm specific variables. In summary, this screening process leaves us with a final sample consisting of 150 rights issues over the sample period which is then intersected with detailed information of stock price, firm specific and ownership data. For each rights issue in our sample we obtained information about the terms from the Stockholm Stock Exchange. In addition, we collected stock prices and dividends from the Thomson Financial Datastream database as well as from the Stockholm Stock Exchange. In our analysis of stock prices we use daily data. As mentioned earlier, ownership structure in Swedish public firms is monitored by law by the Nordic Central Securities Depositary (NCSD), a firm owned by Swedish banks and 6

stock broker firms. As of year 2006, total ownership structure in each firm must be recorded at the end of each quarter; prior to that year, the composition was recorded twice a year (end of June and December). Thus, at each of these points in time the complete ownership structure in each firm is recorded. In this study we obtain the complete ownership structure in Swedish firms listed on the Stockholm Stock Exchange as end of June and December for each year during our sample period 2000-2006. For year 2006 we also obtained ownership structure per quarter. Unfortunately, ownership by overseas investors is not as detailed as for domestic investors as holdings by foreign custodians do not have to report nominee identity. For each firm we collect the number of shares held by various investors. More specifically, we obtain the following information for each shareholder. For each institution we obtain an organization number (unique), country of origin and number of shares held in each firm. For Swedish individuals we obtain the social security number and number of shares held. A further breakdown of institutional characteristics is possible for each Swedish institutional shareholder as the organization number enables a further grouping into six different categories; a) limited companies; b) mutual savings associations; c) limited partnerships; d) non-profit associations and religious associations; e) public sector and finally f) the national church. As insurance companies, which also own a substantial part of Swedish firms listed on the Stock Exchange, have a unique organization number code, we are also in a position to identify holdings by these companies. Taken together, this approach enables us to classify domestic institutional shareholders into seven different groups. In our analysis, we examine levels of ownership as well as changes in ownership levels surrounding the initial announcement of a rights issue where we compare our sample firms to a portfolio of firms but without a rights issue or stock splits over the sample period. We summarize the characteristics of firms and also the development of right offerings in Sweden in Table 1. Over the entire sample period, Swedish firms raised a total of 74.4 billion SEK in equity. The largest offerings ever made on the Swedish Stock Market, so far is the offering by the telephone company LM Ericsson which raised 30.1 billion SEK (representing roughly 6.5% of the total market capitalization value of equity) in year 2002. As indicated in the table the mean (median) proceeds raised was 277 (82.7) million SEK, in other words, the distribution is highly skewed. The fifth column in the table shows the distribution of offerings over time and indicates that the issues are fairly distributed across our sample period. 7

2.2 Methodology We measure the announcement effect of a rights issue by employing a standard event-study methodology where we analyze the mean cumulative abnormal return (CAR) over the period (-1 to +1) event windows surrounding the initial announcement date. We obtain CARs by using the market model and where we estimate the firm specific variables using the Scholes- Williams procedure to overcome problems with thin trading. We use the OMXS valueweighted index as the proxy for the market. As we are interested in levels as well as changes in ownerships, we first compute total holdings for our different ownership groups and for each firm as of the end of June and December over our sample period. We define institutional as well as individual ownership percentage as the number of shares owned by institutions divided by the number of outstanding shares. We designate the initial announcement date as period 0, and period -1 and -2 as the first and second half year period relative to period 0 respectively. A similar approach is used in the post-offer period (period +1 and +2). Next, we analyze changes in ownership. As the initial announcement date can be months ahead of the actual settlement date, we need to stipulate the date to identify changes in ownership. We do this by tracking the period when the number of outstanding shares, as recorded by the Central Security Registrar NCSD, will change. We then use the previous period as the pre-issue period and then compute changes in ownership which we denote as prior and post respectively. In our analysis of changes in ownership, we compare changes in firms with rights issues to a sample of matching non-issuer firms. To circumvent problems to find a perfect matching firm (i.e., difficulties to find a non-issuer firm listed on the Stockholm Stock Exchange with similar industrial classification code, book-to-market ratio, market capitalization value of equity and momentum) we use an equal weighted portfolio of 30 non-issuer firms as a benchmark throughout our sample period. 3 Results Panel A of Table 2 reports our estimates of the wealth effects for firms with rights issues on the Stockholm Stock Exchange over our sample period 2000 to 2006. Our estimates are calculated by using the market model over the (-1, +1) window, and day 0 is the initial announcement date and the market index is the OMXS value-weighted index. The firm 8

specific parameters are estimated over the trading days -200 to -20 relative to day 0. The mean (median) abnormal returns are 3.03% (-2.42%) and are statistically significant. The wealth effect also varies across our sample firms and ranges between -23.79% (Enlight) and 9.43% (Information Highway). Panel B reports mean and median abnormal returns by year and the data indicate that median abnormal return for each year is negative. Our results of the wealth effects are lower than prior findings of rights offerings in Sweden, as in the study by Cronqvist and Nilsson (2005) which analyzed the sample period 1986 to 1999, and can be attributed to falling stock prices and the IT-bubble-period for our sample firms. Overall, our finding of a negative announcement effect is consistent with prior studies, see Eckbo and Masulis (1995), but not with Geberhardt et al. (2001) which analyzes seasoned equity offerings in Germany. Next, we examine the asymmetry-reduction hypothesis, which argues that the information process, gathered by institutional investors, increases the amount of preannouncement information about a firm. Hence, the announcement effect (positive or negative) of an announcement of a rights issue should be smaller if institutional holding is as high as the information is already priced in the stock. Thus, we predict a relationship between the absolute level of the wealth effect and the level of institutional ownership. In our analysis, we use the absolute 3-day average abnormal return as the dependent variable (ABAR) and our three control variables are: a) total number of institutions owning shares of the issuing firm s stock (NINST), b) total institutional ownership in percent (INSTHLDGS) and c) size of the issue (SIZE), defined as proceeds raised divided by market capitalization value of equity (as of December the year prior to the issue year). The result of the ordinary least square regression model is as follows (t-statistics within parentheses), ABAR i = 4.20-0.01(NINST i ) -5.80(INSTHLDGS i ) + 0.88 (SIZE i ) (1.40) (-3.82) (-1.82) (0.40) R 2 =0.34 F-Value = 5.47 As mentioned, the asymmetry-reduction hypothesis predicts that high institutional ownership levels decrease the information content of a rights issue announcement. Consequently, we expect negative signs for the regression coefficients (NINST) and (INSTHLDGS) in our model. Consistent with the asymmetry-reduction hypothesis, the estimated coefficients are negative. However, only the first control variable is statistically significant (t-statistic -3.82). In summary, our result gives mild support that higher degrees of institutional ownership levels are associated with a more subdued wealth effect over the announcement period. 9

Table 3 reports ownership structures for our sample firms and matching non-issuer firms. We report ownership levels, defined as a percentage of total outstanding shares (cash flow), at the end of the settlement period (period 0), as well as before and after the announcement period (period -1, 1 and 2 respectively. In Panel A we report ownership levels for our three major groups, domestic institutions, overseas institutions and domestic individuals. As shown, mean as well as median domestic holding levels by domestic institutions in our sample firms are higher in three of four periods compared to matched nonissuers. At the end of the announcement period, the mean (median) holdings for domestic institutional holdings are 34.42% (32.82%) of total outstanding shares and 36.00% (30.15%) for matched non-issuers. Table 3 also shows that mean overseas institutional holdings (21.95%) are lower compared to domestic institutional holdings in our sample firms but higher compared to non-issuers. Mean (median) total holdings by domestic individuals are 43.62% (46.75%) in the announcement period and 41.67% (43.86%) in the period immediately following (period 1). For the largest firm listed on the Stockholm Stock Exchange, the telephone company LM Ericsson, holdings by domestic individuals changed in the opposite direction. At the end of the announcement period, total domestic individual holdings are 18.44% (representing a total of 881,087 individuals) whereas domestic individual holdings are 12.85% (representing 661,014 individuals) in the period before the announcement period. Overall, the size of mean holdings by domestic individuals indicates a significant dispersion in ownership structure across our sample firms. In summary, the analysis of ownership levels across our three groups in Panel A indicates that institutional investors increase and domestic individuals reduce their holdings following a rights issue. This change in ownership is also larger for domestic than overseas institutional investors. In Panel B of Table 3 we report ownership levels for domestic institutions grouped into four different categories, limited companies, insurance companies, non-profit associations and foundations, and the public sector. Mean (median) total holdings by limited companies, in essence public investment companies and the mutual fund industry, are 19.59% (14.66%) in the announcement period and increase to 22.12% (15.01%) in the period immediately following the announcement period for our SEO-firms. This is not the case for holdings in non-issuers as the ownership level in these firm drops from 26.15% in the announcement period to 24.00% in the period following the settlement date. Ownership appears on the whole to play an important role in the firms capital structure decision. More specifically, our result shows that holdings by domestic as well as overseas 10

institutional investors increase following a rights issue, hence domestic individuals do not fully participate in rights issues. Table 4 reports the mean change in institutional holdings as well as for domestic individuals as a percentage of outstanding shares (cash flow) before and after the settlement period. We report mean changes for three groups; domestic institutional investors, overseas institutional investors, and domestic individuals respectively. The null hypothesis is that the changes in holdings for firms with rights issues and non-issuers are equal. The Satterthwaite test is used to examine the statistical significance in the changes. We find that total domestic institutional holdings increase in firms with rights issues following a rights issue but decrease in non-issuer firms. The difference is 1.60% for firms with offerings and -5.25% for matched non-issuers. A similar finding is documented for overseas institutional investors where holdings increase by 0.35% for issuers and decrease by 0.90% for matched non-issuers. We also document that holdings by domestic individuals decrease in firms with rights issues. Overall, these findings suggest that domestic individual do not fully participate in rights issues in Sweden. As we have shown, the lower holding by individuals is followed by an increase in holdings by institutional investors where the largest take-up is by domestic institutions. To further examine the behaviour of institutional investors in firms with rights issues we analyze in detail the trading pattern surrounding the offer. Thus, if managers in institutions trade to take advantage of their private information about a firm s valuation level, we expect to find an increase in holdings in firms when overvaluations decrease and a reduction if overvaluations increase. Our procedure is as follows. First, we sort our sample firms into three groups based on the change in institutional holdings before and after the settlement period. We denote these groups as low, moderate and high institutional buying groups respectively. We then calculate the mean pre-issue stock returns for each firm as well as the post-issue stock returns. As the initial announcement of a rights issue can take place months ahead of the settlement, we compute the pre-issue and the post-issue stock return for one calendar year before and after, measured from the end of the settlement period. All returns are measured relative to a portfolio (equal weighted) of non-issuer firms. Table 5 reports the results. As reported, for all institutional investors, the pre-issue return varies between 20.12% and 65.15% for the low and high buying groups in the year preceding the rights issue. For domestic institutional investors the pre-issue return varies between 26.15% and 52.65%, and for overseas institutional investors it varies between 11

22.45% and 29.12%. If we examine the post-issue return, additional perceptions between the two groups can be identified. As reported, in the one-year period after the settlement period, firms with rights issues in the high-buying group outperform their benchmark by 35% while those in the low-buying group underperform by 7.45%. As indicated, the 42.45 percentage point difference between these two post-issue returns is also statistically significant. We see the same pattern for overseas institutional investors. The high-buying group outperforms their benchmark by 6.25% and the low-buying group underperforms their benchmark by 19.15%. The difference between high-and low-buying groups is also statistically significant (at the 1% level). In summary, our results suggest that institutional investors increase their holdings in firms with rights issues that, on average, outperform their benchmark in the post-issue period (i.e., the year following the settlement period). Moreover, our analysis of domiciles of the institutional investor indicates that they as a group, generally speaking, possess stock-picking abilities. The data shows also that domestic institutional investors exhibit a greater stockpicking process related to rights issues than overseas institutions. All in all, our results are consistent with prior studies of institutional investors (Gibson et al., 2004). 4 Summary and Implications Our analysis provides a unique look into levels and changes in ownership surrounding rights issues in Sweden over the sample period 2000 to 2006. The introduction of domiciles of institutional investors contrasts prior research. Our analysis of returns indicates that the wealth effect to a rights issue is negative and thus consistent with prior research. The results also indicate that the announcement effect is related to ownership structure. The information asymmetry reduction argument, which predicts that high levels of institutional ownership will cause a smaller magnitude in stock price reactions, is supported by our data. Consistent with this hypothesis, we find that the absolute value of the initial announcement period abnormal returns is negatively related to the level of institutional ownership. We also find that institutions change their holdings in firms with rights issues. More specifically we document that domestic individuals reduce their holdings and domestic institutional investors increase their holdings. Holdings by overseas institutional investors are more or less unchanged. 12

Our examination of institutional trading surrounding rights issues suggest that institutional investors increase their holdings in firms with rights issues that, on average, outperform their benchmark in the post-issue period. Moreover, our analysis of domiciles of the institutional investor indicates that they as a group, on average, possess stock-picking abilities. The data shows also that domestic institutional investors exhibit a greater stockpicking process related to rights issues than overseas institutions. All in all, our results are consistent with prior studies of institutional investors (Gibson et al., 2004) and indicate that the markets are not fully integrated when it comes to institutional behaviour and rights issues as domiciles seem to be of importance. 13

Table 1 Descriptive statistics for firms with rights offerings on the Stockholm Stock Exchange over the sample period 2000 to 2006. Panel A reports frequency and total capital raised in the offerings and the ratio between proceeds and market capitalization value of equity (defined as end of the year prior to the initial announcement date). Panel B reports the distribution of firm and stock price characteristics as well as institutional ownership structure, both in number as well as holdings (cash flow) in sample firms. Panel A: Frequency Distribution of Sample and Size of Offerings Year Number of Rights Issues (percent) Total Proceeds, million SEK Mean (median) Proceeds, million SEK Mean (median) of Proceeds / Market Capitalization Value of Equity 2000 9 (6) 3,507 389.7 (185.9) 0.3277 (0.1582) 2001 21 (14) 1,505 71.7 (72.2) 0.3093 (0.2033) 2002 19 (12) 31,074 1,635.5 (109.7) 0.2817 (0.2510) 2003 29 (19) 1,703 58.7 (55.4) 1.2431 (0.3412) 2004 25 (16) 1,572 62.9 (93.0) 0.4534 (0.3578) 2005 27 (18) 3,136 116.2 (84.2) 0.6239 (0.2448) 2006 24 (16) 155 6.5 (87.5) 0.3735 (0.2966) Total 154 (100) 42,497 277.0 (82.7) 0.6065 (0.2868) Panel B: Market Value, Price, Proceeds and Ownership Structure, 2000 to 2006 Mean Median Minimum Maximum Market value of equity, 6,413.2 256.9 0.77 45140 (million SEK) Share price (SEK) 42.95 9.73 0.47 677.99 Proceeds / Market Capitalization Value of 0.6065 0.2868 0.0400 13.3100 Equity Total number of shareholders 14251 4515 1132 706952 Total number of institutional 1000 335 123 45938 investors Total ownership by 0.5637 0.5329 0.1712 0.9522 institutional investors Total ownership by overseas 0.2211 0.1801 0.0143 0.5892 institutional investors Total ownership by domestic institutional investors 0.3426 0.3149 0.0822 0.8854 14

Table 2 This table reports event study returns for our sample of firms with rights issues on the Stockholm Stock Exchange over the sample period 2000 to 2006. The announcement effect is calculated as the mean cumulative daily abnormal return (CARs) over the three-day window period (day -1 to +1) where day 0 is the initial announcement date. The abnormal return is defined as the difference between the actual return and the expected return. We use the market model to estimate the expected return where we estimate the firm specific parameters over trading days -200 to -20 with Scholes-Williams method. We use the OMXS value-weighted index as the proxy for market. Panel A reports descriptive statistics for the mean abnormal returns over the sample period and Panel B reports mean and median abnormal returns by year. Mean Abnormal Return, % Panel A: Full Sample (n = 68) Mean -3.03 Median -2.42 Min. -23.79 Max. 9.43 Panel B: By Year Mean Median 2000 1.85-0.16 2001-4.66-2.85 2002-2.08-1.37 2003-6.09-6.10 2004-3.22-3.96 2005-2.14-1.12 2006-3.75-4.45 15

Table 3 This table reports total ownership structure, measured as percentage of outstanding shares, in firms with a rights issue and a matching non-issuer firm on the Stockholm Stock Exchange between 2000 and 2006. Ownership structure for all firms is obtained from the Central Security Registrar in Sweden, NCSD. Each period represents the half-year period relative to the initial settlement period (period 0). Ownership in firms is recorded as end of June and December for each calendar year over the sample period. Panel A Mean (median) Level of Ownership (%) in Firms with Rights Issues and Matched Non-issuers -1 0 1 2 Domestic institutions -SEO-firms 33.87 34.42 36.02 33.69 (31.32) -Non-issuers 31.05 (26.50) Overseas institutions SEO-firms 22.64 (18.02) -Non-issuers 22.50 (19.02) (32.82) 36.00 (30.15) 21.95 (18.99) 26.00 (18.05) (34.00) 30.75 (28.65) 22.30 (18.02) 25.10 (16.05) (30.21) 32.00 (29.15) 23.87 (20.00) 16.50 (18.95) Domestic individuals -SEO-firms 43.49 (45.53) -Non-issuers 46.45 (34.45) 43.62 (46.75) 38.00 (44.00) 41.67 (43.86) 44.15 (42.00) 42.43 (43.75) 51.50 (46.75) Limited Companies -SEO-firms 18.23 (14.96) -Non-issuers 19.12 (16.50) Insurance Comps. -SEO-firms 4.80 (2.78) -Non-issuers 3.95 (2.85) Non-profit associations and foundations -SEO-firms 4.63 (2.05) -Non-issuers 4.22 (3.15) Public Sector -SEO-firms 5.43 (3.82) - Non-issuers 3.55 (3.40) Panel B Mean (median) Level of Ownership (%) and Domestic Institutional Investors 19.59 (14.66) 26.15 (17.15) 4.50 (2.18) 5.25 (4.75) 4.31 (2.34) 1.00 (0.98) 5.80 (4.51) 2.60 (3.12) 22.12 (15.01) 24.00 (25.12) 4.35 (2.88) 3.15 (3.20) 4.18 (2.57) 2.15 (2.00) 5.10 (3.68) 1.45 (2.15) 18.47 (11.82) 20.55 (19.75) 4.72 (2.18) 3.25 (3.12) 3.96 (2.30) 2.25 (2.12) 5.87 (4.67) 5.95 (5.65) 16

Table 4 This table reports total change (mean) in institutional ownership structure before and after the settlement period (period 0) for firms with rights issues and non-issuer firms on the Stockholm Stock Exchange between 2000 and 2006. Ownership structure for all firms is obtained from the Central Security Registrar in Sweden, NCSD. Our null hypothesis is that the changes in holdings between firms with rights issues and non-issuer firms are equal. Mean Changes (%) in Ownership Holdings before and after the settlement period over the sample period 2000 to 2006 Domestic institutions -SEO-firms 1.60 - Non-issuers -5.25 Difference in changes 6.81 (p-value) (<0.001) Overseas institutions - SEO-firms 0.35 - Non-issuers -0.90 Difference 1.25 (p-value) (<0.001) Domestic individuals - SEO-firms -1.95 - Non-issuers 6.15 Difference -7.90 (p-value) (<0.001) 17

Table 5 This table reports total changes (mean) in institutional ownership structure (immediately before and after the settlement period) in firms with rights issues on the Stockholm Stock Exchange over the sample period 2000 to 2006. Pre-issue return is the return on the stock measured one year before the end of the settlement period. The post-issue return is the return measured one year after the end of the settlement period. All returns are adjusted for the return on a portfolio (equal weighted) of non-issuer firms. Type of Institution Mean Change, % Pre-issue Return (-1 year), % Post-issue Return (+1 year), % All institutions Low -9.55 20.12-12.55 Moderate 4.75 27.08-7.50 High 12.25 65.15 12.00 High-low difference 21.80 45.03 24.55 (p-value) (<0.001) (<0.001) (<0.001) Domestic institutions Low -13.00 26.15-7.45 Moderate 3.95 30.33-11.65 High 25.25 52.65 35.00 High-low difference 38.25 26.50 42.45 (p-value) (<0.001) (<0.001) (<0.001) Overseas institutions Low -19.00 22.45-19.15 Moderate 3.55 25.15-9.55 High 11.00 29.12 6.25 High-low difference 30.00 6.67 25.40 (p-value) (<0.001) (<0.001) (<0.001) 18

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