Nuno Soares

Purpose: This paper aims to analyse the causes and impact of the significant mean price discounts (25 per cent for financial and 29 per cent for non-financial firms) in rights issues in the UK using a sample of 268 observations for the period of 1994 to 2012. It is observed that for non-financial companies, the issue terms announcement returns are negatively affected by the discount size, while firm size, growth prospects and good previous stock performance have a positive impact. It is also investigated which factors seem to influence managers to engage in deeper discounts when these are so disliked by investors. Evidence is provided that firms with more leverage, larger bid-ask spreads or suffering losses tend to choose deeper discounts. The authors conclude that managers balance the expected negative reaction of the market to a price discount with the risks of a costly issue failure, with these being higher when the firm experiences losses, has a higher volatility and also when the stock market climate is more adverse.Design/methodology/approach: The analysis is divided in two stages. In a first step (thereafter pre-announcement), the authors evaluate the firm’s and market conditions that determine the price discount. In a second stage (post-announcement), the authors measure the market reaction to the rights issues announcement by calculating the abnormal announcement returns by cumulating the difference between daily returns (R) and expected market returns (ER) for the period of −2 to 2 relative to the announcement day.Findings: The authors document that price discounts in right issues for non-financial and financial firms are determined by a set of firm-characteristics and market sentiment. They also bring evidence that price discounts are not arbitrarily determined by firm managers.Originality/value: The results are consistent with the idea that despite the negative signal to investors conveyed by a significant price discount in the new shares, managers of non-financial companies still engage in substantially price-cutting.

We analyse the causes and impact of the significant mean price discounts (25% for financial and 29% for non-financial firms) in rights issues in the UK using a

In this paper, we apply a modified one-stage version of the Mishkin (1983) test to companies in the UK stock market in order to investigate the presence or otherwise of the accruals anomaly in UK firms’ annual returns. For the period of 1990-2007, we report that there is little evidence of a general accruals anomaly in the UK, in which accruals have a negative relationship with future returns, once risk and other potential forecasting variables have been accounted for. We also provide evidence that, after winsorising extreme observations, there is a cash flow anomaly in the UK stock market. We also find evidence in favour of an anomaly with respect to capital expenditure growth. Another interpretation is that the accruals anomaly is not distinct from other anomalies in the UK market, whereas the cash flow (and the capital expenditure growth) anomaly is.

In this paper, we provide evidence related to the existence, or otherwise, of the accruals anomaly in the UK stock market. Specifically, we find that average annual abnormal returns generally decline as prior period accruals move from low to high. This outcome can be interpreted as broadly consistent with the accruals anomaly via which investors overweight the persistence of accruals and underweight the persistence of cash flows in predicting next period's earnings. Our results suggest that to make money out of any mispricing based upon ranking firms by accruals generally requires a portfolio strategy with long and, in particular, short positions in portfolios featuring relatively small capitalisation firms. When taking into account conservative estimates of trading costs, the investment strategy is seen to generate losses if an initially equally‐weighted investment approach is used or positive, but not statistically significant, abnormal returns if a value‐weighted approach is followed. Overall, we conclude that, whilst there is evidence of mispricing consistent with the accruals anomaly, the profitable exploitation of the anomaly is not necessarily possible when transactions costs are taken into account. Thus, the accruals anomaly is not so egregious in the UK as to challenge the semi‐strong version efficient markets hypothesis.