Valuation effects of new equity issues by banks : evidence from Japan

This article examines the valuation effects of new equity issues by Japanese banks through private placement. Although past studies have shown a positive market response to private placement, our results indicate that abnormal returns are, on average, positive but statistically insignificant. Such findings fail to support the notion that private placements help resolve the problem of information asymmetry. However, after controlling for bank capital, the valuation effects for banks with higher capital are significantly negative, whereas those with lower capital are significantly positive. The difference suggests that valuation depends on whether capital regulation motivates the new issue. Moreover, there is a negative correlation between Nonperforming Loans (NPLs) and valuation effects. This indicates that an increase in the uncertainty of bank loan quality is associated with a negative market response. Finally, the results show that new issues with a single purchaser convey more negative information to the market than those with multiple purchasers. This is consistent with the potential entrenchment effect of private placements.