Agency Cost, Investment Opportunity and the Rights Equity Issue Decision - Evidence from an Emerging Market
32 Pages Posted: 22 Feb 2005
Date Written: Septemeber 2004
Abstract
In the Indian market, majority of the subsequent equity issues are sold through rights offerings (ROs) and ROs are associated with positive market reaction. We show that this positive reaction is mainly concentrated among growth firms having better investment opportunity. In the long-run, issuers under-perform a carefully selected matching portfolio. This underperformance is significant in comparison with a bootstrapped empirical distribution of pseudo portfolios. This evidence is robust to various estimation procedures and statistical tests. It is interesting to note that the operating performance measures also behave similarly and it is significantly related to the stock performance. Our analysis establishes that agency costs and over-investment hypothesis can better explain the deteriorating performance.
Keywords: Rights equity issue, long-run stock performance, operating performance, investment opportunity, information asymmetry, ownership structure, market efficiency
JEL Classification: G14, G32, M41
Suggested Citation: Suggested Citation
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