Market Reaction to Intended Use of Proceeds Disclosure: Evidence from Australian SEO's

Abstract

We study a sample of 568 Australian rights offerings made during 2003-08 to examine the market response to the reasons stated by the firm for the use of capital on announcements. We also examine the impact of the extent of disclosure of use of proceeds on market response. Using event study methodology and cross sectional regressions, we find that the market response to offerings for capital expenditure purposes is significantly less adverse than to offerings for other purposes. However, the study does not find an association between the extent of disclosure of use of proceeds and the market response. Our findings suggest that the market appears to be interested in the broad classification of the intended use of proceeds on announcement and specifying a dollar amount for each of the intended use listed on announcement is not value relevant.

Keywords: Rights offerings, SEO's, Use of proceeds, Specificity

JEL Classification: G14