The Pricing and Impact of Rights Issues of Equity in Australia
39 Pages Posted: 12 Sep 2007
Abstract
We investigate abnormal returns resulting from the announcement of a rights issue of equity in Australia and are the first study outside the U.S and the U.K to examine the pricing of rights issues and the determinants of that pricing. Rights issues are met with a significantly negative abnormal return and, on average, are priced at a discount. The determinants of the announcement effect are analysed using a two stage approach to control for the endogeneity of the price discount. We first estimate the predicted discount and then include it as an independent variable in the announcement effect regression. The discount is positively related to the offer size and negatively related to underwriter quality, supporting underwriter certification models. We also include variables that have not been tested in any market, such as shareholder concentration which is negatively related to the price discount implying that firms with higher shareholder concentration do not offer a significant discount as their shareholders wish to maintain their percentage holding in the firm. Further, we analyse the determinants of the abnormal returns and find a negative relationship with the predicted issue price discount, and a positive relationship with the use of proceeds. Finally we find that announcements made by resource firms generate larger negative reactions than other issuers.
Keywords: Rights issues, underpricing, announcement effect
JEL Classification: G14, G32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Adverse Selection and the Rights Offer Paradox
By B. Espen Eckbo and Ronald W. Masulis
-
By Jun-koo Kang and René M. Stulz
-
Seasoned Equity Offerings: A Survey
By B. Espen Eckbo and Ronald W. Masulis
-
The Choice between Rights Offerings and Private Equity Placements
By Henrik Cronqvist and Mattias Nilsson
-
By Myron S. Scholes and Mark A. Wolfson
-
An Empirical Analysis of Incremental Capital Structure Decisions Under Managerial Entrenchment
By Abe De Jong and Chris Veld
-
Equity Financing in a Myers-Majluf Framework with Private Benefits of Control
By Xueping Wu and Zheng Wang
-
Equity Financing in a Myers-Majluf Framework with Private Benefits of Control
By Xueping Wu and Zheng Wang
-
Seasoned Equity Issues in a Closely Held Market: Evidence from France