Equity Issues and Ownership structure in the French closely held market
Isabelle DUCASSY, Assistant Professor
Euromed Marseille School of Management, BP 921, 13288 Marseille Cedex
Tel office : 33 4 91 82 79 45 / mob : 33 6 08 95 14 33
This paper examines the relation between changes in firm value associated with equity issue
announcements and ownership structure. Several studies have shown that these announcements
are related to a negative valuation effect on the issuing company’s value; our research focuses
on the extent to which ownership structure influences this impact. When there is a controlling
shareholder the theoretical arguments differ to varying degrees. According to the entrenchment
theory, equity issue announcements should have a negative valuation effect due to a higher risk
of misappropriation of raised capitals. However, according to the agency theory the negative
impact is less pronounced as the controlling shareholders are willing to invest in monitoring
costs. In the same manner, the institutional investors’ role still remains to be established. As
they dispose of reduced access and information processing costs, they should be encouraged to
exercise an active control over the management. Therefore equity offerings by companies with
an institutional ownership could result in less significant downpricing. However, this argument
can be contested. Institutional investors, developing other business relations with the issuers,
may find it beneficial to cooperate with the management, thus the negative reaction in stock
prices will be in direct correlation with the extent of the institutional investors’ share.
In order to measure the impact of ownership structure, two groups of variables have been used;
the concentration of capital and the type of shareholders. The results show that that the presence
of a controlling shareholder reduces the negative perception of an equity announcement. In fact,
a shareholder who owns a significant percentage of the capital is encouraged to exercise an
active control over the management of the firm, thus resulting in a favourable valuation effect
when common stock issues are announced. On the contrary, the presence of institutional
investors in the capital results in a negative valuation effect. This can be explained on the one
hand by the probable existence of business relations which prevent the institutional investors
exercising control over the managers and also by the specificity of the French market where the
pressure exercised by the institutional investors over management is rather weak.
Key words: shareholding, equity offerings, shares, institutional investors, block holder
JEL: G320 – Financing Policy; Capital and Ownership Structure; Financial ratios; value of firm.
The study of the relation between the value of the firm and a modification in its financial
structure has given rise to significant literature, both theoretical and empirical. As part of Jensen
and Meckling’s (1976) agency theory, the financial policy is a way of resolving conflicts that
exist between managers, shareholders and creditors. The optimal financial structure results from
an arbitrage between the agency costs of debt and equity. One of the ways to control the
managers or to solve the problems related to the asymmetry of information is to issue hybrid
securities. According to Charreaux (1993), this approach encourages the financial experts ..../.....
to deal with such questions as the ownership structure, the board of directors or the systems of
management remuneration, in so far as they have a direct influence on the financial policy.
Myers and Majluf (1984) state that the financial policy induces a valuation effect. According to
the hypothesis that managers act in the interests of the firm’s shareholders and in the presence of
an asymmetry of information, the authors explain the consequences of issuing different
securities on the firm’s value. The management take advantage of an over evaluation of the
stock prices to issue equity which compensates for the dilution the current shareholders
experience. The issue announcement sparks off a negative reaction. The transfer of wealth
which occurs at the moment of the shareholders’ issue to the new investors is all the more
important as the return on the securities that have been issued depends on the firm’s value. As a
result debt issues are preferable to risky debt issues, these being preferable to equity issues.
Empirical studies show that issues of security with an equity component – convertible bonds,
stocks, warrant stocks – have a negative impact on firm value1, whereas the issue of ordinary
bonds has a neutral response. Concerning the variables which influence this perception of the
market, research shows that the negative impact of issue announcements is, for example,
attenuated by the presence of investment opportunities or by a favourable context on the stock
exchange; however it is amplified by a strong asymmetry of information, a high level of risk
from the issuer or an increase in the issuer’s stock prices before the announcement2. Whereas
much research, theoretical as well as empirical, has been dedicated to the influence of ownership
structure, for instance, on performance3, there are few studies on the relation between changes in
financial structure and capital ownership4.
According to Charreaux (1991) there are three principal conceptions of this relation, the
alignment-of-interests, neutrality and CEO entrenchment. According to the alignment-of-
interests theory, the higher the percentage owned by management, the more the latter will adopt
firm value-maximising behaviour (Jensen & Meckling, 1986). In the thesis on neutrality
(Demsetz, 1983), all the structures are equivalent, the ownership structure represents an “an
endogenous outcome of a maximising process…”. Lastly, according to the entrenchment theory,
(Morck, Schleifer & Vishny, 1988), the managers who possess a solid majority of the capital
escape from all market discipline and can thus manage with a perspective opposing the creation
The empirical studies carried out by Charreaux (1991) in France indicate that performance
considered from the shareholders’ point of view leads us to conclude in favour of neutrality;
performance studied from the angle of firm value confirms the thesis of the alignment-of-
interests, firms where the ownership separation/decision is weak will be more competitive. Still
quoting Charreaux, the divergence between the two perspectives confirms the importance of the
See for example on the US market Asquith and Mullins (1986) and Dereeper (2002), Gajewski and Ginglinger
(2002) or Ducassy (2003), on the French market.
See for example Masulis and Korwar (1986).
See for example on the French market Charreaux (1991) or Paquerot and Mtanios (1999)
See for example Eckbo and Norli (2005) on the Norvegian market and managerial ownership, and Field and Mais (1994) or
Datta and al. (2005) on the US market and private placements.
role of financing as a fully-fledged means of management in the agency relation between
managers and shareholders. We therefore propose to shed further light upon this relation
between the financing decision and the ownership structure. Does the legal status of the
shareholders or the degree of concentration of capital influence the impact of seasoned equity
issue announcements on the stock exchange?
In the presence of a controlling shareholder, the theoretical arguments vary to different degrees:
according to the entrenchment theory, equity issues should have a negative valuation effect due
to an increased risk of raised capital misappropriation. The agency theory contradicts this,
stating that a less pronounced negative impact is to be expected, as the controlling shareholders
are prepared to invest in monitoring costs. In the same way the role of the institutional investors
remains to be ascertained. As they dispose of reduced access and information processing costs
they should be encouraged to exercise an active control over the management of the firm, thus
equity offerings by companies with high institutional ownership could bring about a lower
reduction in share prices. This last argument can be contradicted by the fact that institutional
investors sometimes develop other business relations with the issuers, may find it advantageous
to cooperate with the management, therefore the negative stock price reaction would increase
depending on the extent of the institutional investors’ share.
This work is divided into three parts. Firstly we present a review of theoretical and empirical
literature and our hypothesis, secondly the data and the methods used, and lastly the results.
1- INFLUENCE OF OWNERSHIP STRUCTURE : THEORETICAL AND
EMPIRICAL BACKGROUND AND HYPOTHESIS
1.1- Impact of a controlling shareholder
According to the entrenchment theory, managers can be encouraged to develop strategies in
order to maintain their position in the company. Their purpose is to make it costly to replace
them thus enabling them to increase their power and their remuneration. According to
Alexandre and Paquerot (2000), they use the firm’s assets to neutralise the systems of control
and increase the dependence of all the firm’s partners on the resources that they control. Still in
accordance with the authors, major shareholders having a less diverse portfolio than minority
shareholders, are more exposed to the effects of entrenchment strategies. They are thus more
sensitive to potential losses related to the disappearance of managerial annuities in the event of a
change of management, especially when the latter have built a strong synergy between the
firm’s assets and their human capital. Therefore, there is a possibility that controlling
shareholders support entrenched managers. Consequently these arguments go against the
positive effect of ownership concentration according to the agency theory.
On the French market, the evidence provided in the prior studies is mixed. Alexandre and
Paquerot (2000) confirm the entrenchment theory on the ineffectiveness of control structures
and the dependence of the different partners of the firm with regards to the managements’
human capital, whereas Parrat’s (1999) findings demonstrate that the French market follows
this tendency as the author shows that firms with entrenched managers have a better
performance. Castanias and Helfat (1992) explain why the entrenchment of managers will have
a positive effect on performance : indeed the managers’ skills and savoir faire are at the root of
certain managerial incomes, hence strong monitoring and control would compel the managers to
waste time trying to avoid these controls. It is therefore more advisable to leave them room for
manoeuvre, consequently by maximising their own interests, they will also maximise the
According to the agency theory, the ownership structure can help controlling the managers. The
concentration of capital can solve the problem of incentive thus contributing to an improvement
in the firm’s performance. When ownership is dispersed, one sole shareholder will not invest to
control the firm’s management as he alone will bear this cost, even though all the shareholders
benefit from this investment. In this case each shareholder is encouraged to act as a free rider,
and managers can develop opportunist behaviour. On the contrary, we would expect a major
shareholder to invest in the monitoring of the firm’s management as he will benefit from
significant supplementary incomes due to being able to monitor the management more
effectively. As information between managers and investors is asymmetric and the gathering of
information is costly, only those investors who have an adequate share in the capital will gain a
significant profit. Many authors5 have shown that the presence of a controlling shareholder
guarantees that the management is more effectively monitored, and Denis and Mc Connell
Demsetz 1983, Shleifer & Vishny 1986, Agrawal & Mandelker 1990, Jensen 1990, Bethel & Liebeskind 1993,
Agrawal & Knoeber 1996, Denis et al. 1997.
(2003) in an international survey on corporate governance systems around the world, conclude
that ownership concentration tends to have a positive effect on firm value.
Hill and Snell (1988; 1989) show a positive relation between the degree of capital dispersal and
the diversification strategy followed by the firm. According to these authors, this is due to the
fact that diffuse ownership makes it difficult to control the managers. In the same way Pound’s
(1988) research shows that when shareholders contest propositions emanating from the
managers, their chances of being heard are higher if there are few shareholders and therefore a
strong concentration of capital.
In the presence of a controlling shareholder, the manager / shareholder conflict is replaced by a
controlling / minority shareholder conflict. Concentrated ownership structure induces high levels
of monitoring, hence maximizing the firm value. But ownership concentration can be costly, due
to the extraction of private benefits by “control coalition”, and as reported by Burkhart and al.
(1997), high levels of monitoring can render the management less active, and then reducing the
firm value. When costs of concentrated ownership are lower than the adverse selection ones, as
in many countries excepting United States and United Kingdom, a controlling shareholder is
desirable. According to Faccio and Lang (2002), 86% of the French firms have a controlling
owner at the 20% level, 63% of European firms, but only 37% of UK firms. There is another
reason in favour of a positive influence of controlling shareholder for equity issues. One of the
arguments pointed out by previous studies to explain negative reaction to equity issues is high
pre-issue returns. If controlling shareholders extract private benefits, and to avoid a negative
signal resulting, they will try not to issue overvalued equity, which could lower their holdings
value. To the contrary, in case of dispersed ownership, managers will more often take advantage
of this timing opportunity. In their empirical study on the Spanish closely held market, Arrondo
and Gomez-Anson (2003) show that ownership concentration reduces the negative reaction of
We expect there to be a positive relation between the impact of equity issues and the presence of
a controlling shareholder in so much as a controlling shareholder can exercise a more effective
control than the minority shareholders.
Hypothesis 1: There exists a positive relation between the impact of an equity issue and the
concentration of the stock ownership.
1.2 Influence of the type of shareholders
Several categories of shareholders type are underlined in the agency theory, notably corporate
and institutional shareholders. The latter disposing of reduced access and information processing
costs, they are assumed to be more efficient and have an incentive to exercise an active control
over the management of the firm. They must manage their interests efficiently, protecting their
investment and monitoring the funds raised by issuing equity. As there is a possibility that they
may finance the firm, they have an incentive to carry out controls (Carney, 1997). Bathala and
Moon’s (1994) studies confirm that the presence of institutional investors helps reduce agency
costs. Their presence increases the speed at which the information is incorporated in the stock
prices as they are more active on the market. It has been proven that the stronger the asymmetry
of information between the issuer and the market, the more negative the impact induced by the
announcements (Dierkens, 1991). According to Friend and Lang (1988), a strong percentage of
institutional investors in the capital should have a favourable influence on the reaction in stock
prices, due to a better control of managers. The announcements made by issuers monitored by
institutional investors convey very little information to the market. These announcements should
have a less important impact on the market than issues from non-monitored firms. Lastly, the
interest shown by institutional investors in a certain security can also contribute to increase the
liquidity of the stock price and thus reduce the price discount (difference between the issuing
price and the average price before the announcement) at the moment of an issue. The firms in
which the institutional investors have securities should thus experience a weaker reaction when
issuing common stock. El-Gazzar (1998) points out the higher the institutional holdings, the
lower the market reaction to earnings releases. Consequently when there is a high institutional
ownership, we expect equity issue announcements to have a less negative impact.
Previous studies show divergent results regarding the type of shareholders. The percentage held
by the institutional investors does not have any influence according to the results of Field and
Mais (1994) or Filbeck (1996)6; instead the share price reduction is attenuated in accordance
with the studies by Brous and Kini (1994).
The variables used are the number of institutional investors owning securities and the percentage of securities
owned by the institutional investors.
Lastly the research carried out by Szewczyk et al. (1992) shows that the absolute magnitude of
the share price reaction is negatively related to the level of institutional ownership7 in the
announcing firm. The impact is not necessarily more favourable when the announcements are
made by firms with institutional investors in their capital; however the announcements made by
issuers having little institutional ownership are those who spark off the strongest reactions, both
negative as well as positive. Hence, these results are consistent with the argument that the
information acquisition activities of institutional investors reduce preannouncement information
asymmetries between managers and the capital market. These results are inconclusive regarding
the positive or negative influence of institutional investors.
Several explanations can be evocated. As control is costly, these shareholders will perhaps
hesitate to engage costs because of the free rider problem. It can be more valuable for them to
sell their shares instead of bearing monitoring costs. Moreover, concentrated ownership could
help institutional using an illegitimate influence on managers to secure their private benefits.
Finally, as the institutional investors have to render accounts (to their shareholders), they try to
avoid any variation in performance, which may occur in the event of a change of management,
as the firm’s assets are strongly related to the managers’ human capital. Therefore institutional
investors will tend to support management. We can also add that this type of shareholder may
develop other business relations with the issuer. Consequently they can find it advantageous to
co-operate with management and thus decrease their monitoring in order not to endanger these
relations. On the French market, the studies of Romieu and Sassenou (1996) illustrate that
institutional investors have no influence on the firm’s performance. Still referring to the French
market, Paquerot and Mtanios (1999) remind us that more often than not, the pressure exercised
by the shareholders or the partners of French insurance companies remains weak when it comes
to motivating the administrators to intervene in the companies in which they are shareholders.
Likewise Ben M’Barek (2003) confirms the passivity or the neutrality of the institutional
investors on the French market, and Benkraiem (2007) results show that these investors can
intervene with managers and move them away from using discretionary accruals to adjust
earnings, but all institutional should not be considered as able to limit managerial opportunism.
In Arrondo and Gomez-Anson (2003) study, bank holdings are not significant in explaining
stock reaction to seasoned equity issues.
The variables tested are the number of institutional investors owning shares of the issue and the percentage owned
by the institutional investors (the month preceding the issue).
We could therefore expect there to be a negative relation between the abnormal returns observed
at the time of the announcement and the level of ownership by the institutional investors.
Hypothesis 2: A strong institutional ownership accentuates the share price reduction at the
moment of the announcement.
2- DATA AND RESEARCH METHODOLOGY
The sample we studied is made up of 89 common stock issue announcements made by French
companies quoted on the former “premier” and “second” markets between 1992 and 1999, with
73 rights issues and 16 public offerings. Until 2000, there were several regulated markets within
the Paris Stock Exchange. The “Premier marché” consists of a cash market (“marché au
comptant”) with trades being settled in cash8 and also a monthly settlement market (“marché à
réglement mensuel”) for the most actively traded stocks with settlement occurring at the end of
the month. The second market (“second marché”) is designed to accommodate medium-sized
companies who needs only float 10 per cent of their total equity, whereas the main market
demands 25 per cent.
The issuers are divided as follows: 57 belong to the “premier marché” (20 to the “comptant” and
37 to the “réglement mensuel”) and 32 to the “second marché”.
2.1- Sample description and data sources
The accounting data is originally from the Dafsa files for the years 1992 to 1993, from the Dafsa
CD ROM for the years 1994 to 1998 and from the firms’ annual reports for the year 1999.
Returns and dividends were extracted from the Datastream database. Characteristics of the
issues come from the issue prospectuses of the “Autorité des Marchés Financiers” (AMF9) or
from the notice published by the BALO (“Bulletin des Annonces Légales Obligatoires”). BALO
is a bulletin of legal announcements required under French law. Companies listed in France
This market was affected by a lack of interest as it was comprised of a majority of companies which were by and large not well
known to the general public.
“Commission des Opérations de Bourse” until 2002 ; The AMF plays the same role as the SEC in the US.
have a legal requirement to publish certain financial information in the BALO, including equity
The ownership structure was obtained with the help of the Dafsa company files, the CD ROM
Dafsa companies and Dafsa links.
2.2- Event study methodology
We performed a standard event-study to measure the price impact of seasoned equity offerings
announcements. To avoid all problems of contamination of the event, issuers having made
another announcement during the period of the event were eliminated10.
In France, the first announcement date comes in the registration statement filed with the AMF11.
The parameters for the event study are calculated for a period of 110 days (between -120 and -
11 days before the announcement), the event period is defined over 21 days around the date of
announcement. Three reference returns are used: the market adjusted returns12, the mean
returns13 and the index returns14. We thus obtained the abnormal returns at each date of the event
period, calculated by the difference between the observed return and the normal return. As the
abnormal returns obtained with the three methods were comparable, for the sake of clarity, we
selected the results obtained from one method only, this being the mean model.
2.3- The variables tested
In order to test the two previous hypotheses, we used two series of variables as described in
table 1, the presence of a controlling shareholder and institutional ownership.
The use of the Tribune’s and the Echos’ CD ROMs (the two main financial newspapers in France) enabled us to
easily control the dates of the announcements. These other announcements can be a profit announcement, the
transfer of one market to another, a simultaneous issue of another security, a reduction of capital, a division or
consolidation of securities, an allocation of shares or free subscription bonds, the upholding of a stock price, a
merger or a takeover in process.
Contrary to the US and the Wall Street Journal, no newspaper in France gives coverage of equity issues.
Rit = αi + βi RMt with Rit: profitability expected from the share i at the date t and RMt: profitability of the market
at the date t.
Rit = Rit, ∀t.
Rit = RMt, ∀i; the index return used in this study is the SBF 250 calculated over the 250 most liquid securities. The index
return takes into account the reinvestment of dividends.
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Table 1 – Ownership variables description
CONTROLLING MAJ = 1 if a shareholder owns more than 50% of the capital
%2premact Two principal shareholders’ ownership
INST = 1 if institutional investors are present in the capital
INSTITUTIONAL %INST Institutional ownership
OWNERSHIP Total percentage owned by the institutional investors /
number of institutional investors in the capital
2.4- Descriptive statistics
In table 2 there appears to be a relatively strong concentration of capital, with an average of less
than three shareholders identified, and the main shareholder owning on average more than 48%
of the capital15. French market is characterized by concentrated equity ownership (known
shareholders ownership is 66%, similar to Ginglinger and Gajewski (2002) findings of 64%).
The average institutional ownership adds up to less than 8%. These findings are consistent with
Faccio and Lang (2002) comparative search in Western Europe.
Table 2 – Issuers’ ownership
Mean Median Minimum Maximum
Number of shareholders owning more than
2.5 2 0 6
5% of the capital
Principal shareholders’ ownership (%) 49.1 49.5 3.2 96.7
Two principal shareholders’ ownership (%) 59.1 61.3 5.0 97.5
Three principal shareholders’ ownership (%) 63.5 65.2 5.3 99.5
Ownership of the principal known
66 69.6 5.3 99.5
Institutional ownership 7.6 0 0 58.5
Number of institutional investors 0.8 0 0 4
In table 3 it can be noticed rather logically, that the share held by the principal, the two principal
or the three principal shareholders is always higher on the cash and second markets than on the
monthly settlement market. Almost all the cash market and monthly settlement market firms
have an institutional investor in their capital, and their share of ownership is clearly the same for
Consistent with Godart’s study (2005) according to which the main shareholder’s ownership is on average
48.83% on the French market.
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the two markets, with respectively 8.34% and 8.9%, whereas for the firms on the second market
it amounts to 5.6%.
Table 3 – Issuers’ ownership according to the market capitalisation segment
Capitalisation compartment Cash Second market
Ownership variables Mean Min Max Mean Min Max Mean Min Max
Number of shareholders ownership
2.70 1 6 2.78 1 5 2.11 0 5
more than 5% of the capital
Principal shareholders’ ownership (%) 54.4 20.2 96.6 51.5 15.8 80.6 41.8 3.24 96.6
Two principal shareholders’ ownership
66.4 30.2 97.5 64.4 27.8 86.7 50.6 4.99 96.6
Three principal shareholders’ ownership
70.4 30.2 97.8 70.3 32.3 99.5 53,8 5.29 96.6
Ownership of the principal known
72.1 30.2 97.8 73.6 33.3 99.5 56.1 5.33 96.6
Number of institutional investors 0.95 0 4 0.59 0 4 0.97 0 4
Institutional ownership (%) 8.34 0 30.4 5.8 0 32.8 8.9 0 58.5
As in Paquerot and Mtanios’ (1999) work, there appears to be a rather large diversity (table 4) in
the ownership structures of the different market capitalisation segment studied. A large majority
of the firms on the cash and second markets have a controlling shareholder who owns more than
50% of the capital, whereas this is the case of only 38% of the companies listed on the monthly
settlement market (MSM). Nearly 57% of the companies MSM have at least one institutional
investor in their capital as opposed to only 40% for the companies listed on the second market.
Table 4 – Issuers’ ownership according to the market capitalisation segment
Cash settlement TOTAL
Number of equity issues 20 37 32 89
Percentage of issuers with a controlling
55.0% 37.8% 56.3% 48.3%
shareholder (> 50%)
Percentage of issuers having at least one
50.0% 56.8% 40.6% 49.4%
institutional investor in the capital
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3- EMPIRICAL RESULTS
3.1- Price reaction to equity offerings
Table 5 along with graph 1 show that our sample firms experiences a significant negative
cumulative abnormal return whatever the period around the announcement date. These results
are consistent with previous studies, on US market (Asquith et Mullins, 1986 ; Masulis et
Korwar, 1986 ; Datta et al., 2005) but also on concentrated markets like the French one
(Dereeper, 1999 ; Ginglinger et Gakewski, 2002) or the Spanish one, where Arrondo and
Gomez-Anson (2003) document a significant and negative stock reaction of -1.87% on the (-1 ;
Table 5 – Cumulative average abnormal return (CAR) at the common stock issue
Event period N=89
(– 2; +2) – 2,83%***
(– 1; +1) – 1,73%***
(0; +1) – 1,29%***
***: significant at the 1% level
Graph 1 – Price reaction around the announcement date
-10 -5 0 5 10
- 13 -
3.2- Mean tests results
Next we carried out parametric (mean tests) and non parametric (Mann-Whitney) tests by
separating the sample according to the variables characterising the ownership.
3.2.1- Presence of a controlling shareholder
In table 6 it appears that the presence of a shareholder owning at least 50% of the capital leads to
a less significant share price reduction at the announcement date. On average the decrease in
share price is four times lower when there is a controlling shareholder.
Table 6 – Cumulative Abnormal Returns (CAR) according to the presence or not of a
CAR in the MAJ =1 MAJ = 0 Significant difference
period (N=48) (N=41) at the % level
(–2; +2) -1,12% -4,83% 2%
(–1; +1) -0,64% -3,01% 1%
If we separate the firms according to the announcement period abnormal returns, it appears that
74% of firms without a controlling shareholder have abnormal negative returns, compared to
only 49% of firms with a controlling shareholder. This difference becomes significant at the
1.5% level (z = -2.431).
The presence in the capital of a controlling shareholder therefore seems to diminish the negative
perception of issue announcements.
3.2.2- Institutional investors’ ownership
As shown in table 7, the presence of an institutional investor in the capital seems to be related to
an increased negative valuation effect; in fact, the share price reaction is more negative for firms
who have at least one institutional investor in their shareholding.
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Table 7 – Stock price reaction according to the presence or absence of at least one
institutional shareholder in the capital
INST = 1 if at least one CAR in the period :
in the capital (-2 ; +2) (-1 ; +1)
INST = 1 (N=43) -4,42% -2,38%
INST = 0 (N=46) -1,34% -1,13%
Significant difference at the %
Table 8 shows the results of the mean tests carried out when the level of institutional ownership
is lower or higher than 5%. It seems that the institutional ownership is more informative than the
only presence of institutional. The 5% level plays an important role for the market.
Table 8 – Stock price reaction according to the level of institutional investors owning
CAR in the period :
(-2 ; +2) (-1 ; +1)
> 5% (N=38) -4.69% -2.66%
< 5% (N=51) -1.44% -1.04%
Significant difference at
the % level :
Likewise in this case, a high level of participation of institutional investors in the capital seems
to spark off a negative valuation effect at the moment of the issue announcements.
Lastly we have tested the ratio “share of institutional investors / number of institutional
investors in the capital”; the results are shown in table 9. There is an increased negative relation
in the reaction in share prices when the ratio (share of institutional investors / number of
institutional investors) is high (higher than the average). Therefore, it seems that when the
institutional ownership is made up of few investors whose average share in the capital tends to
be high, the market reacts more negatively than when the ownership is made up of a larger
number of investors possessing a lower share of the common stock.
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Table 9 – Stock price reaction according to the ratio share owned/ number of institutional
CAR in the period :
(-2 ; +2) (-1 ; +1)
(PART/NB) > mean (N=37) -4,63% -2,56%
(PART/NB) < mean (N=52) -1,55% -1,14%
Significant difference at the % level : 5% 10%
PART/NB: Total percentage held by the institutional investors / number of institutional investors in the capital
We can also ask ourselves the question of the influence of the market capitalisation segment,
both on the presence of a controlling shareholder and on the institutional ownership. In fact
more than 55% of the firms of the second market and of the cash market have a controlling
shareholder compared to less than 38% of the firms quoted on the monthly settlement market,
and almost 57% of the companies of MSM have at least one institutional investor in their
capital, as opposed to 40% for the companies of the second market. We therefore carried out a
series of tests by market segment16, which overall give the same results as for the total sample.
3.3- Cross sectional analysis
To finalise this study, we carried out a multivariate analysis with control variables, in order to
test the influence of the capital structure and the type of shareholders. Definitions and
calculations for all variables used in the cross sectional analysis are provided on table 10.
We carried out the average tests with the variables INST and MAJ, on the different capitalisation segment, but
also by regrouping cash and monthly settlement markets, and cash and second market
- 16 -
Table 10 – Variable definitions and calculations
Variable Description of the indicator Notation
Stock price reaction Cumulative abnormal return between date -2 and +2 CAR
VARIABLES CHARACTERISING THE ISSUER
Variation of debt to equity ratio between N-1 (the year prior to
Financial structure the announcement) and N (the year of the announcement), in ∆LEV
Standard deviation of security’s returns / Standard deviation of
index returns, calculated over days -120 to -11.
Growth opportunities Variation of market-to-book ratio ∆MTBV
Market value of equity calculated by multiplying the closing
Size stock price on the 31/12 of the year prior to the announcement SIZE
year by the number of shares outstanding prior to the
Use of proceeds Dummy variable = 1 if firm issues in order to acquire another INVEST
firm or to invest in a project
Abnormal returns Preannouncement cumulative abnormal return calculated over
before the RUNUP
days -120 to -11
Growth Range in the turnover / range in the operating result ∆CA / ∆RE
VARIABLE CHARACTERISING THE ENVIRONMENT
Stock market performance calculated over days -120 to -11 prior
Bull market MRUNUP
to the announcement (SBF 250)
VARIABLE CHARACTERISING THE ISSUE
Number of shares being issued / number of shares outstanding
prior to the announcement
Ordinary least squares regression models are estimated, to avoid multicolineary problems,
several models have been tested, the results are reported in table 1117.
We also test “rights”, a dummy variable that takes the value of 1 if the offer is a rights issue, but inclusion of a dummy
variable for rights issues does not alter the results: this variable showed an insignificant coefficient and was dropped.
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Table 11 – OLS regression results explaining announcement abnormal returns
for 89 seasoned equity issues
Dependent variable = CAR (–2; +2)
Adjusted R² 0.096 0.129 0.097 0.124
F-statistic 2.57** 4.27*** 2.47** 3.14***
MODELS (1) (2) (3) (4)
Intercept -6.83** 1.82 -5.04 -4.50**
MAJ – – 2.83*
INSTIT – – -3.40** –
%instit – -0.171*** – –
%2premact 0.068* – – –
RISK -0.162 – – –
SIZE – – 0.25 –
∆LEV -0.004 -0.002 – -0.003
AI – – – –
∆MTBV 0.004 * – – 0.004**
RUNUP - -0.067** -0.05* –
INVEST – – 2.49* –
∆CA / ∆RE 0.992** – – 0.853*
MRUNUP 0.059 – – 0.048
DILUT – -0.078** – –
***, **, *: significant at the % level: 1%, 5% and 10%.
Cross sectional analysis results show that the concentration of capital is a positive factor; in fact
the presence of a controlling shareholder plus the two principal shareholders’ ownership
significantly limits the share price reduction at the moment of the announcements. A controlling
shareholder reduces the negative abnormal returns observed around equity issues. On the French
market, where ownership concentration is high, concentration costs are weaker than adverse
Firms with a controlling shareholders experiment a 9,5% price runup before issues
announcement versus more than 17% for the other firms, meaning that controlling shareholders
try to avoid negative signals when issuing equity, whereas managers of dispersed ownership
firms will more often take advantage of a stock overvaluation before the issue. For the Spanish
market, Arrondo and Gomez-Anson (2003) found that the market reaction is less negative the
higher the firm’s ownership concentration. These results are not inconsistent with the research
on private benefits : accepting the fact that controlling shareholders can extract private benefits,
timing equity issues after price runup will be less important for them, and to the contrary they
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will try to minimize the loss which could occur after issues in these cases. The other significant
variables between the two groups (presence or not of a controlling shareholder) are risk and
issue motive : controlling shareholder firms are usually less risky and issue more frequently for
On the contrary, the presence of institutional investors, and the share held by institutional
investors have a negative valuation effect and accentuate the share price reduction, thus
confirming the results of the mean tests. It is observed that price runup is higher for firms with
institutional holdings (8.8% VS 3.4%), but growth (∆ operating result / ∆ sales) is lower, even
negative (-15% VS +55%).
Studying abnormal returns more accurately shows :
- firms without controlling shareholders nor institutional holdings issue after the highest
price runup (+25%), meaning that ownership plays a significant role when timing the
- according to ownership structure, negative returns for the (-2 ; +2) window are the
following : controlling shareholder and no institutional holdings, -0,6%; controlling
shareholder and institutional holdings, -2,1%; no controlling shareholder and no
institutional, -3%; no controlling shareholder and institutional holdings, -5,8%.
Institutional ownership seems to be a really negative signal for equity issuers.
How can this negative influence be explained ? Previous empirical studies have shown for the
French market, a rather weak influence of institutional investors, the former selling their shares
instead of monitoring the firms. Moreover, institutional may not have incentives to monitor the
issuers because of business relations. Institutional being more present in large firms, size could
be an explanation, but size does not explain abnormal returns.
As reported in existing studies (Datta and al., 2005 ; Akhigbe and al., 2006), the market
penalizes more equity issues made when stock prices are over evaluated, confirming Myers and
Majluf asymmetric information hypothesis : the higher the increase in the issuer’s stock prices
before the announcement, the more the issue will have a negative impact. To the contrary, the
positive and significant coefficients for INVEST and ∆RE/∆CA show a positive relationship
between market reaction and investment opportunities and growth. Logically, stock price
decline is negatively related to offerings dilution, the percentage change in outstanding shares
has a negative effect : the market reacts more negatively to issues for which the dilution is
- 19 -
greater, confirming previous results on the French (Ginglinger and Gajewski, 2002) and US
markets (Asquith and Mullins, 1986 ; Bayless et Chaplinsky, 1996). Other variables, like
leverage, risk or firm size do not influence market valuation for equity issuing firms.
This paper aims to study stock reaction to equity issues and how this impact can be explained,
especially by ownership variables, in the French stock market. As in previous empirical studies,
our results show that the market reacts negatively to common stock offerings, with a loss of
2.8% for a period of five days around the announcement. We have tried to find out to what
extent the ownership structure influences this impact. Two groups of variables have been used to
measure this influence; the concentration of capital and the type of shareholders. Capital
concentration is negatively and significantly related to cumulative abnormal returns. This
indicates that the presence of a controlling shareholder reduces the negative perception of an
equity offering. Two explanations can be suggested. First, a shareholder who owns a significant
share of the capital is prompted to exercise an active control over the management of the firm,
which results in a favourable impact at the time of the announcement. Second, controlling
shareholders may try to avoid negative signals when issuing equity and will not take advantage
of a stock overvaluation before the issue, whereas managers of dispersed ownership firms
On the contrary the institutional investors’ presence in the capital is related to a negative
valuation effect, which can be explained not only by the probable existence of business relations
which prevent the institutional investors from exercising control over the management, but also
by specificity of the French stock market where the institutional investors’ pressure on the
management tends to be weak18. In compliance with existing research, the presence of growth
opportunities or a good economic performance by the issuer limits the share price reduction.
Equity issues announced after strong increases in stock prices have an increased negative
See Ben M’Barek (2003) for a summary of the factors explaining the passivity or the neutrality of the
institutional investors vis-à-vis the control the firms exercise over their portfolios.
- 20 -
Corporate governance suggests institutional investors have a rather positive influence, but
concerning financing decisions, we find opposite results, and previous studies on firm
performance also show a negative influence. Future research will have to think about how to
improve institutional monitoring in the French civil law context.
The principal limit to this research lies in the fact that this study has been carried out using the
percentage of capital held by the shareholders19, and not with that of voting rights20. However
there is no database that permits us to establish this variable. It would also be of interest to test
the influence of the variation in capital ownership on the impact on the stock-exchange: which
valuation effect causes a modification in the percentage held by a controlling shareholder or by
the institutional investors? It is unfortunate that although in the majority of cases the principal
shareholders’ intentions are known, it remains difficult to accurately measure the variation in the
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