Primary equity formation in Australia

Primary equity issues provide an injection of funds from the sale of new shares priorto stock exchange listing. Typically, new primary equity is publicly sourced via an initialpublic offer (IPO). In Australia, however, a direct placement to private and institutionalshareholders may also be undertaken prior to flotation.This dissertation begins with a review of the Australian institutional issuanceenvironment. The empirical analysis uses a sample of 1,351 Australian primary equityraisings that listed between January 1983 and June 1995. In aggregate, these equity raisingstotalled A$30B (in 1997 constant dollars), having an average issue size of A$24.4M andaverage flotation costs of 7.88%. Two formation decisions, relating to the demand forunderwriter services and choice of distribution method, are investigated. In each study, atheoretical model is developed and tested using logit regression analysis.In the context of the demand for underwriting services, transaction costs,information asymmetry, risk transfer/avoidance and self-marketing hypotheses from thefinancial intermediation literature are examined. Empirical results support the transactioncosts, liquidity and risk transfer/avoidance hypotheses, but not the information asymmetryexplanations.The choice of primary equity distribution method is analogous to the public versusprivate funding choice reported in the debt market literature, in which the source of fundingis related to transaction costs and information asymmetry hypotheses. This framework isaugmented by marketing risk and channel structure considerations, and by corporategovernance based research in the IPO literature that suggest the maintenance of privatecontrol rights and preferences for a particular initial ownership structure, motivatedistribution choice. Support for transaction costs and marketing risk explanations isidentified in a reduced form model. Moreover, corporate governance considerations arefound to be important for small equity raisings