Clifford G. Holderness is Professor of Finance at the Carroll School of Management at Boston College. This post is based on a recent paper by Professor Holderness.
In the United States and a few other countries, management typically needs only board of director approval to issue common stock. But in most countries by law or stock-exchange rule, shareholders must vote to approve equity issuances undertaken by a certain method or exceeding a specified fractional threshold. In some countries shareholders must approve all equity issuances. Even in the United States shareholder approval is mandatory under certain circumstances.
This widespread heterogeneity in shareholder approval, which has been overlooked to date, is associated with several robust empirical regularities. Most notably, shareholder-approved issuances are associated with positive and higher announcement returns compared with managerial issuances, 2% versus -2%. The closer the vote is to the issuance or the greater is the required plurality, the higher are the returns for public offers, rights offers, and private placements. When shareholders must approve equity issuances, rights offers are far more common than public offers. When managers may issue equity without shareholder approval, public offers are far more common than rights offers.
