CHOICE OF FINANCING IN A BORROWING-CONSTRAINED ECONOMY AND LONG-TERM PROFITABILITY EFFECTS

This paper examines the long-run stock performance of equity issuers in a borrowingconstrained emerging economy and documents no negative abnormal stock performance when there are severe borrowing constraints. This result is robust to the inclusion of several risk factors and firm characteristics as control variables in the regressions. Findings of this study might have important implications for other emerging markets and international investors taking positions in these markets. The corporate finance literature is rich with studies that examine the long-run stock and operating performances of companies that issue seasoned equity. Findings from developed markets generally document negative abnormal returns and poor operating performance in the long-run following a seasoned equity offering (SEO) 1 . Several studies also provide evidence that the stated purpose by the managers regarding the use of the SEO proceeds typically affects this long-run stock performance. For instance, Hertzel and Li (2010) report that issuers with higher growth opportunities do not experience negative abnormal returns in the long-run. In line with this literature, Lyandres, Sun and Zhang (2008) propose an investment factor that is equal to the return on a portfolio that is long in low-investment stocks and short in highinvestment stocks and show that this factor helps to explain the SEO underperformance. Separately, Billett, Flannery and Garfinkel (2011) argue that the negative post issue underperformance is related to the number of different types of securities issued but not to the specific type of security issued per se. They show that, after controlling for multiple security issuances, there is no statistically significant underperformance following bank loan issues, SEOs and private equity placements. The goal of this paper is to analyze the long-run stock performance of firms issuing new equity as rights offerings in Turkey over a period from January 1989 to June 2013 and examine the role of the investment and liquidity factors as well as multiple right issues in explaining the long-run performance following these corporate events. There are a limited number of studies analyzing the long-run stock performance of companies issuing seasoned equity in emerging economies such as Turkey (Wang, Wei and Pruitt, 2006; Matthew, 2002). Moreover, studies on emerging markets document results that are not compatible with the findings from developed markets. According to these studies, SEO firms in emerging markets have either positive or zero abnormal stock performance in the long-run as opposed to the negative performance predominantly reported for the SEO firms in developed markets. These different findings imply that firms in emerging and developed markets may have different investment strategies. More studies on emerging markets are needed in order to better understand the dynamics of security issuance in these markets. Since emerging markets are attracting more and more international investors and provide higher diversification benefits (Li, Sarkar and Wang, 2003; Gupta and Donleavy, 1 Loughran and Ritter (1995), Spiess and Affleck-Graves (1995), Jegadeesh (2000), Bayless and Jay (2003) report this underperformance for the US seasoned equity offering firms. Ho (2005), Stehle, Ehardt and Przyborowsky, (2000), Kabir and Roosenboom (2001) document this for the UK, Germany and the Netherlands, respectively. Pastor-Llorca and Martin-Ugedo (2004) report negative abnormal returns for Spanish companies that issue seasoned equity in general and Farinos (2001) documents similar findings for only smalland mediumsized Spanish firms.