A Background to Firms in the ACE Market Essay

Chapter ONE

BACKGROUND OF STUDY

  1. Introduction

Rights issue is a cosmopolitan and widespread attack used by houses in assorted states to bring forth new capital. From the past grounds, for illustration in London, there was ?1 to ?1.5 billion has been raised through rights issues each twelvemonth in London Stock Exchange ( Marsh, 1979 ) . Recently, the rights issue has besides been used as a tool for a company to hike new capital. For case, one of the Finnish Miner Taivivaara’s biggest companies was utilizing rights issue to raise 260 million Euros capital in the largest metropolis of Finland, Helsinki to maintain its nickel mine running ( Reuters, 2013 ) . Similarly in Malaysia, statistically about RM14.9 billion equity capitals was raised via denoting rights issues in Bursa Malaysia ( Shamsher and Annuar, 1993 ) . Besides that, Malayan Airline System Bhd ( MAS ) has besides announced rights issue to raise new capital and eventually brought a higher capital of RM 3.07 billion to the company ( The star, 2013 ) . As a consequence, rights issue is one of the of import considerations for a company to be competitory in the investing markets.

Furthermore, the houses in ACE market are usually little and moderate-sized endeavors. Therefore they require an avenue to raise new capital so that they can last and go on to turn. Alternatively of raising new capital through loans from fiscal establishments or commercial Bankss that will hike their liability, publishing rights issues proclamation has become their ultimate picks. For case, EA Holdings Bhd ( EAH ) , which is one of the houses in ACE market, was proposed to publish rights to raise a new capital entire RM63.6 million with RM30 million to finance suited and feasible profitable investing, RM28.3 million for working capital and RM4.5million for cut downing liability ( Free Malaysia Today, 2014 ) . Therefore, there is a demand to look into stock monetary value reaction on rights issues in ACE market due to refering of houses in bring forthing new capital.

  1. Definition of ACE Market

ACE Market is a secondary stock market in Kuala Lumpur Stock Exchange ( KLSE ) which is besides known as Bursa Malaysia. ‘ACE’ is standing for ‘Access, Certainty and Efficiency’ , a revamp of the older Mesdaq Market that was launched in twelvemonth 1997. This development of secondary stock market attack was made in August 2009. Although ACE Market is define as a new version of Mesdaq Market, ACE market is different from Mesdaq Market as it involves sponsor-driven and unfastened to companies of all sectors and point accents revelation and efficiency compared with Mesdaq ( The Star, 2009 ) .

Harmonizing to Bursa Malaysia, manner of naming for companies in ACE market got no lower limit runing path record or net income demand. However, companies with smaller graduated table of capital that is less than RM6 million net incomes after revenue enhancement for the most recent three to five full fiscal old ages are non qualified to be listed in the chief market and so will be listed in secondary market. Nowadays, harmonizing to Bursa Malaysia, there are a entire figure of 109 companies were listed in ACE Market from twelvemonth 2006 to the beginning of current twelvemonth 2014.

ACE Market’s chief aim is to let local and foreign corporations of all sectors to entree the capital market under a sponsor-driven model. This development model will increase efficiency and fight in the stock market while protecting investors at the same time.

  1. Definition of Stock Price

In general, stock monetary value is referred to the monetary value of stock as quoted on an exchange in stock market. Stock monetary value can be quoted as command and inquire monetary value and last traded or terminal monetary value. Any information in stock monetary value is promotion. Everyone can seek for the latest stock monetary value through online or other way without any perturbation.

In fiscal facet, stock monetary value is the cost for the individual portion in the company. Since the unnatural return or addition can non be observed straight, the market stock monetary values will be use as a constituent to cipher unnatural return addition or lose in the market around the period of denoting rights issues.

1.4Rights Issues

1.4.1Definition of Rights Issues

Rights issue is an offer of new portions by a listed house to its bing stockholders at a price reduction monetary value and with the preemptive rights to subscribe to new portions in a pro-rata footing ( Malhotra et al. , 2007 ) . The term ‘rights’ is refers to the fact that bing stockholder has the rights of first refusal before the new portions are offered to the populace.

The subscription monetary value for the new portions based on the rights is below the market monetary values of the bing portions or the monetary value offered to the populace ( Shahid et al. , 2010 ) . The preemptive right is given to the bing stockholders the entitlement to subscribe a new portion issued by a house at the proclamation day of the month. The stockholder who holds the preemptive rights can make up one’s mind to subscribe or sell their rights to the populace if they forgo the opportunity to have the new portion. However, they are encouraged merely to subscribe the new portions in proportion to the figure of portions they already owned ( Annuar and Shamsher, 1993 ) .

In this survey, the focal point is on rights issues as the impact of rights issues on stock monetary values is of import for most of the listed houses in ACE market.

1.4.2Importance of Rights Issues

Besides from helping the house to raise new capital, rights issues can profit the stockholders in three ways. First is to heighten the hereafter stock monetary values, 2nd is to supply watchful shareholders’ or investors’ opportunities to derive unnatural returns and in conclusion is to avoid dilution of ownership.

Rights issues play a critical function in finding the hereafter stock monetary values based on shareholder’s appraisal. Harmonizing to Annuar and Shamsher ( 1993 ) , bing stockholder have the possible to measure the future stock monetary value as they have the rights to make up one’s mind either to purchase or sell the rights. If they are steadfastly convinced that the firm’s chance is bright and benefit is guaranteed from the portion, they will put more in the house via buying all of the pro-rata offerings. This will upgrade the firm’s good will and therefore offer up the portion monetary values. In contrast, if they perceived the firm’s chance is unwanted such as expected return is non achieved, bulk of them will allow off their preemptive rights to buy the new portions. Hence, this will convey negative impact to the firm’s portion monetary value.

Furthermore, rights issue proclamation provide qui vive investor an chance to gain unnatural return when the market is non efficient. The inefficient market supply a agency of market monetary values do non reflects all available information and cognition of historical monetary values can non be used to foretell future monetary values. Therefore, if rights issue is perceived as favorable intelligence, investor can utilize the privately-owned information to surpass the market. This can be proved from the statement of Dawson ( 1985 ) which stated that an investor can bring forth extra return if they have identified information that is non reflected in security monetary values.

Besides from the benefits of deriving unnatural returns, stockholders can forestall the dilution of their ownership towards the firm’s capital when publishing new stocks. The company will offers bing stockholder the preemptive rights to subscribe a given figure of portions based on pro-rata footing and at a specified subscription monetary value that is less than the offered monetary value in market. Therefore, the bing stockholders proportionate ownership of the company will stay fixed and unchanged by buying the new stocks via discounted monetary values. This can be proved by the statement of Shahid, Xia, Mahmood, and Usman ( 2010 ) , which stated that rights issues enables bing stockholders to safeguard their proportionate ownership in the company.

1.4.3The Issue of Pre-emptive Rights to be Concern

Minority stockholder is the firm’s equity holder who own below 50 per centum ownership of the firm’s equity capital. Thus they do non hold the authorization to command the ballots. However, they can trust on the preemptive right given by the house to protect them from possible maltreatment by commanding stockholders through subsequent issue of vote and sharing stock to the populace. Some of the bing stockholder would waive the rights to subscribe new portions and give foreigners the opportunities to put in the house equity. This would therefore alter the vote per centum ain by equity holders. This is because the opportunity for each stockholder to monopoly the firm’s capital would be lesser if there is more equity holder to portion one piece of pie.

Although publishing rights can protect minority stockholders, such subsequent stock issue could impair the place of older stockholders. Harmonizing to Dolley ( 1934 ) , the voting control of each old stockholder would be decreasing proportionally if the new stock issued were voting stock. The house may hold assortment categories of common portion and the portion with superior voting power is classified as voting stock. If the older stockholders keeping a lower vote category of common stocks, their ownership per centum will be reduced via subsequent issue of voting stock to foreigners. Therefore, bing stockholders should do a deep consideration on make up one’s minding whether to subscribe or sell the new portions to public.

1.4.4The Regulatory Framework of Announcing Rights Issues in Malaysia

Harmonizing to Sukor and Bacha ( 2010 ) , every house that wants to set about a rights issue must run into some basic demands stairss. First, the house must acquire blessing from it firm’s bing stockholders through an Extraordinary General Meeting ( EGM ) before seeking blessing from Securities Commission ( SC ) .

Second, all the issues must be underwritten by a merchandiser banker. Therefore the house should name a extremely dependable banker to move as adviser to transport on the regulated activity of reding corporate finance and fix prospectus. Besides documented readying, the duty of an investment banker is to take up any issues non to the full subscribed by bing stockholders and populaces if announced. Harmonizing to Salamudin, Ariff, and Annuar ( 1999 ) , an underwritten is responsible in reding the houses the appropriate figure of portion to be issued, suggested offer monetary values by sing the net touchable assets of the house, proceed from the projected ; and in conclusion finding the clip to publish rights by sing the predominating market conditions.

The undermentioned measure is to inform Bursa Malaysia the four of import day of the months, that’s the intended day of the month of public proclamation, the ex-date, the Book Closing Date ( BCD ) and the shutting day of the month for reception of applications for and credence of the rights. Meanwhile, the house must guarantee that the interval between these day of the months is conforming to Bursa’s demands which province the upper limit and lower limit of each interval. As a decision, a house that decides to set about a rights issue should ever mention to this formal model as a proper counsel.

1.5Problem Statement

There were legion old researches had been conducted to analyze the monetary value reaction to proclamation of rights issues in foreign state such as U.K ( March, 1979 ) , U.S ( Kothare, 1991 ) , Korea ( Kim et al, 1990 ) and so on. However, there was merely one old similar research reported so far in Malaysia were conducted by Salamudin, Ariff and Annuar, ( 1999 ) to analyze the monetary value behavior of seasoned equity issues on a sample of houses in chief market, KLSE.

Besides that, ACE Market is a new model for listing and equity fund raising launched by KLSE in the twelvemonth 2009, which has non been tested by any research worker to research farther cognition on rights issue proclamation. Therefore, this survey adds value to the literature by understanding the monetary value reaction on rights issues proclamation in ACE Market and to farther probe.

1.6Aims of Study

The chief aim of this survey is to place the relationship between stock monetary value and rights issue proclamation. Therefore this survey is to analyze whether there is positive or negative market reaction towards rights issue proclamation in ACE Market.

1.7Hypothesis

Most of the old research that has been done in foreign state paperss a important relationship between rights issues and market stock monetary values. The earliest survey made by Marsden ( 2000 ) in New Zealand verified that there was a important negative relationship between rights issues and market stock monetary values in New Zealand capital market. However, the determination was disproved by the farther research worker Marisetty et al. , ( 2008 ) examined a positive monetary value reaction to rights issues proclamation in India market. Hence, the hypothesis is proposed as below:

H1: There is a important relationship between rights issue and market stock monetary values.

1.8Significance of Study

This survey has delivered a few of of import deductions to stockholders and investors in ACE Market. First, stockholders can profit from the rights issues via incremental dividend payment by understanding the utilizations of rights issues and its effects on the stock market monetary values. Harmonizing to Malhotra et Al. ( 2012 ) , rights issues can be decoded as positive information about a firm’s concern chances due to a signal of the house profitable undertakings has encountered. Therefore, the firm’s stock monetary value will respond positively to the rights issue proclamation and so increase the stockholder ‘s dividend to be received.

Besides that, stockholders can besides larn about perceptual experience of possible investor on rights issues through the consequence of positive or negative stock monetary values in the market in order to efficaciously protect their wealth. Harmonizing to Salamudin et Al. ( 1999 ) , negative stock monetary value reaction was due to the overvalued stock monetary value in the market where the prevailing market stock monetary value is higher than its intrinsic value. When investor think that the house is overvalued which conveyed a agency of publishing rights to raise cheaper financess, they will take down their appraisal on market value and so doing monetary value bead. In contrast, the positive stock monetary value reaction was due to the market respond on the rights issue which conveyed an anticipated valuable investing chances ( Cooney and Kalay,1993 ) .

Last, investor can gain involvement from the rights issues by placing the proper clip to gain an unnatural return, whether is the clip prior to, at or after the station proclamation day of the month. Based on the consequence found by Shamsher and Annuar ( 1993 ) , investor can gain unnatural return if they sell portion a month before the proclamation and purchase back the portions 10 yearss after the proclamation in KLSE. The consequence showed provides investor a counsel to expect unnatural return in the hereafter by understanding the stock monetary value circulation in stock market.

1.9The Organization of Study

Chapter One discusses about the background of stock monetary value reaction to rights issue proclamation in ACE Market and general cognition in this field. Chapter Two reviews the old literature reappraisal in this field. Chapter Three describes the information and sample used to carry on an empirical testing. Chapter Four discusses the consequences and findings of the research and Chapter Five concludes the survey.