Equity Issuance and Retirement by Nonfinancial Corporations William R. Kuchinski, Richard E. Ogden, Damian R. Thomas, an

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Equity Issuance and Retirement by Nonfinancial
Corporations
William R. Kuchinski, Richard E. Ogden, Damian R. Thomas,
and Missaka Warusawitharana
The Financial Accounts of the United
States reports quarterly net equity issuance of
nonfinancial corporations.1 New Enhanced Financial
Accounts (EFA) data provides additional information on gross equity
issuance and equity retirements that underlie the net series, as
well as monthly information on two components of gross equity
issuance: initial public offerings (IPOs) and seasoned equity
offerings (SEOs).2 As described below, these
additional data help enhance our understanding of the use of equity
finance by U.S. domiciled nonfinancial firms over the past couple
of decades.
Definition
Net equity issuance in the Financial Accounts is constructed as the
difference between gross equity issuance and equity retirements.
Gross equity issuance equals the value of funds raised through the
sale of equity by publicly and privately held nonfinancial firms.
The IPO series measures funds raised by new public offerings of
equity by firms that are trading publicly for the first time. The
SEO series captures funds raised from new equity issuance by firms
that are traded publicly at the time of issuance.
Equity retirements measures the value of nonfinancial firms'
equity that is retired each quarter. The channels of retirement
captured by this series comprise equity repurchases and retirements
through mergers and acquisitions (M&A). Repurchases represent
the value of equity repurchased by public nonfinancial firms
through share buyback programs. Equity retirements through M&A
activity measure the value of cash-financed transactions by
domestic acquirers plus the value of both cash- and equity-financed
transactions by foreign acquirers.3
Presentation in the Enhanced Financial
Accounts
Expanded equity issuance and retirement data are available in
the Enhanced Financial Accounts project released
concurrently with this FEDS Note. Table 1 shows flow data for both
gross issuance and retirements at quarterly and annual
frequencies—net issuance is disaggregated into a gross issuance and
a gross retirement measure, which is in turn broken down into
retirements due to repurchases and those due to M&A activity.
Additional detail for gross equity issuance is presented in Table
2, which shows the monthly IPO and SEO components of the overall
gross issuance measure in Table 1. Historical data are available
for download in CSV format beginning in 1996:Q4 for the quarterly
data and January 1994 for the monthly data.
Data sources
Gross issuance includes equity issuance by public and privately
held firms. Data on equity issuance by publicly listed corporations
are obtained from S&P Capital IQ's North America Compustat
database. We obtain firm-level data on funds raised through the
sale of common and preferred stocks. Firms are designated as
nonfinancial if their 4-digit Standard Industry Classification
(SIC) code is below 6000 or at or above 7000. After limiting the
sample to nonfinancial firms, we aggregate this series to measure
the sale of equity by public corporations. We obtain data on equity
transactions by privately held firms by aggregating information on
venture capital financing, private equity investments, as well as
private placements from a variety of sources.4
Data on equity repurchases are obtained from S&P Capital
IQ's North America Compustat database, accessed through Research
Insight. We include repurchases of both common and preferred
stocks. The repurchase data are filtered to exclude foreign firms
and subsidiaries. For firms with reporting quarter ends that do not
align with the end of calendar quarters, we apportion the value of
equity repurchased to the current and previous quarter based on
whether the reporting period ends on the first or second month of
the quarter. As in the case of gross equity issuance, firms are
designated as nonfinancial based on their SIC codes.
Data on M&A activity are sourced from Thomson Reuters' SDC
Platinum database. This comprises all U.S. domiciled targets (both
public and private) from SDC's Mergers and Acquisition database,
and includes transactions by both foreign and domestic
acquirers.
Nonfinancial IPO and SEO issuance are obtained from Thomson
Reuter's SDC Platinum software. Data on issuances of common and
preferred stock are obtained from SDC Platinum's Global New Issues
database. Additional filters on the data include ensuring that the
ultimate issuing parent is a nonfinancial U.S. domiciled firm, and
verifying that the security type is neither senior nor junior debt.
Finally, transactions are categorized as IPOs or SEOs based on
SDC's IPO flag code.
Equity financing over time
Figure 1. Equity issuance and retirement over time scaled by
GDP
Shaded regions represent NBER recessionary periods (2001Q2 to
2001Q3 and 2008Q1 to 2009Q2, inclusive).
Accessible version
Figure 1 plots the quarterly gross issuance and retirement of
equity as a ratio of GDP starting in 1996:Q4. The figure indicates
that gross issuance scaled by GDP (the solid black line) has mostly
fluctuated around a narrow band ranging from about 0.5% to 0.75%
over this period, with the exception of the NASDAQ boom period in
the late 1990s, when equity issuance was elevated. This suggests
that, over the past twenty years, U.S. corporations have been
raising funds by selling equity at a steady pace.
In comparison, equity retirements scaled by GDP (the dashed red
line) exhibits a pronounced cyclicality. Equity retirement peaks
just prior to the beginning of a recession. This is driven in part
by the fact that the value of cash-financed mergers and
acquisitions, which contribute importantly to equity retirements,
increases with the value of the stock market, which is also
strongly pro-cyclical.5 In addition, equity
retirements through share repurchases are also pro-cyclical.
The figure also indicates that equity retirements have been
consistently greater than issuances over this period, resulting in
the negative values for net equity issuance reported in the
Financial Accounts of the United States. This reflects the
continued importance of share repurchases as a means of
distributing earnings to shareholders, due in part to the tax
advantage to shareholders of repurchases when compared to dividend
payouts (see Brown et al., 2007). In addition, firms also use
repurchases to offset the dilution of existing shareholders that
occurs through the granting of equity to employees and executives,
a common incentive compensation device.
Figure 2. IPO and SEO issuance scaled by market value
Shaded regions represent NBER recessionary periods (2001Q2 to
2001Q3 and 2008Q1 to 2009Q2, inclusive).
Accessible version
The left and right panels of Figure 2, respectively, plot
monthly IPO and SEO activity of nonfinancial firms as a ratio of
the total stock market value from 1994 onwards. The left panel
indicates that activity in the IPO market has steadily drifted
downwards since its heyday in the late 1990s. Indeed, IPO activity
has been quite lackluster over the current expansion. This may
reflect, in part, the availability of ample equity financing for
private firms through sources such as venture capital.
As shown in the right panel, SEO activity, while volatile, has
not exhibited the secular decline seen in IPO markets. Furthermore,
SEO activity is generally higher than IPO activity, helping explain
the lack of a decline in gross issuance seen in Figure 1. One
noteworthy fact is that SEO issuance rose notably as the recent
financial crisis ended, possibly indicating an attempt by some
publicly listed nonfinancial corporations to repair their balance
sheets through equity finance.
Studies on equity financing
To highlight the importance and potential use of our new data, we
conclude this note by mentioning a few studies that have examined
the determinants and consequences of equity financing. One line of
research studies the cyclicality of equity financing of
nonfinancial firms. Covas and Den Haan, 2011, find that while
equity issuance is procyclical for small firms, it is not so for
large firms. Jermann and Quadrini, 2012, examine the cyclicality of
equity financing flows through the lens of a model with financial
frictions. And Eisfeldt and Muir, 2016, study the link between the
cyclicality of external finance and firm savings.
Another strand of the literature uses the underlying micro-data
to study IPOs, SEOs, and equity repurchases. Chen and Ritter, 2000,
examine the fees associated with the underwriting of IPOs, while
Ritter, 1991, documents the long-run underperformance of firms that
carry out an IPO. DeAngelo et al., 2010, study how market-timing
opportunities and the firm lifecycle stage influence SEO behavior.
Grullon and Michaely, 2004, study why firms engage in share
repurchases. Finally, Warusawitharana and Whited, 2016, investigate
how equity misvaluation can influence the equity issuance and
retirement behavior of firms. By releasing these additional details
on the equity financing of nonfinancial corporations, we hope to
stimulate further research into related topics.
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a. Were U.S. nonfinancial corporations on average
issuing new equity or buying their shares back? Provide evidence
from the article.
b. The pattern of corporate financing is discussed in
the textbook (Figure 15.2 page 487 and the discussion on page 488).
Explain the reasons for this pattern of financing using all
relevant topics/theories of capital structure.