The Informational Effect of an Offshore Securities Offering : Evaluating the Risk to U.S. Investors

This article tests the hypothesis that U.S. issuers may use offshore securities offerings to sell overvalued securities indirectly into the United States securities markets. The article?s data sample consists of 701 offshore offerings conducted under Regulation S of the Securities Act from 1993 to 1997. Evidence from an event study performed on the offerings indicate that the U.S. secondary market reacts on average with a statistically significant negative return to a Regulation S offering. Foreign investors that resell into the United States ahead of the secondary market reaction, therefore, may act as conduits for issuers attempting to sell overvalued securities to U.S. purchasers. On the other hand, foreign investors that resell into the United States only after the secondary market reaction receive the same negative return as U.S. investors. To test whether U.S. issuers are able to use Regulation S to sell overvalued securities into the U.S. market through foreign investors acting as conduits, the article focuses on reforms the SEC undertook in 1996 that greatly decreased the ability of foreign investors to resell into the United States prior to the U.S. secondary market reaction to news of the offering. The article argues that managers, to the extent they seek to benefit pre-offering shareholders, will negotiate to give foreign investors as small an offering discount as possible. Thus, where foreign investors are acting as conduits for the U.S. issuer, they will receive only a fraction of the overvaluation amount in the form of an offering discount from the U.S. secondary market price at the time of the offering. In contrast, where foreign investors are unable to resell prior to the secondary market negative reaction to news of the offering, foreign investors will demand a greater discount in compensation for the entire expected market reaction, leading to a larger offering discount. Prior to the 1996 reforms, therefore, foreign investors should have received a reduced offering discount, all other things being equal, to the extent they were acting as conduits for U.S. issuers selling overvalued securities into the United States. Controlling for other factors that may affect the offering discount, the article furnishes evidence on the offering discount consistent with the hypothesis that foreign investors were in fact unable to engage in resales ahead of the U.S. secondary market reaction to a Regulation S offering even prior to the 1996 reforms