Research on Capital Structure and Financing Decision: Evidence from the UK

Abstract

This thesis focuses on whether the decisions of firms’ external financing activities are influenced by ownership structure, market timing, or public media in the UK context. Chapter 2 examines the effect of ownership on firm capital structure by using a universal sample of UK firms over the period 1998–2009. The empirical results show that the relation between managerial share ownership (MSO) and leverage level is non-monotonic. This study further investigates the effect of ownership on firm financial issuance activities. The finding suggests that firms with higher MSO are more likely to choose equity issues instead of bonds, supporting the theory that managers have more incentive to avoid the bankruptcy risk associated with a bond issue. Further, this study finds a hot (cold) stock market valuation strengthens (weakens) this positive effect of higher MSO on the likelihood of equity issue.

Chapter 3 analyzes the role of ownership characteristics in a firm’s choice of seasoned equity offering (SEO) methods, offer price discount, and market reactions to SEO announcements. This chapter examines UK firms’ choices of seasoned equity issue methods, particularly the differences between rights offers (ROs), placings (PLs), open offers (OOs), and combinations of placing and open offer (PLOOs). This study finds that ownership-concentrated firms prefer rights or open offers to placings, supporting the argument that large shareholders favour right-preserving issues as the SEO method to maintain benefits of control. Consistent with the managerial entrenchment hypothesis, the results indicate that firms with high managerial ownership are more likely to choose placing as the SEO method. This study also suggests that firms with lower institutional ownership are more likely to conduct placing to improve monitoring.

Chapter 4 investigates the role of the news media in SEOs in the UK market. The results show that issuers with positive (negative) media news are likely to price SEO shares higher (lower) and have higher (lower) announcement returns. This finding supports the argument that the media has impact on stock price through affecting investor expectations. Moreover, this study finds that issuers with greater pre-SEO media coverage are likely to have a more negative market response to the announcement, which strongly supports Merton’s investor recognition model.