Agency Cost, Investment Opportunity and the Rights Equity Issue Decision - Evidence from an Emerging Market

32 Pages Posted: 22 Feb 2005

See all articles by Jijo Lukose

Jijo Lukose

Indian Institute of Management Kozhikode

Narayan Rao Sapar

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM)

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

Lukose P. J., Jijo and Sapar, Narayan Rao, Agency Cost, Investment Opportunity and the Rights Equity Issue Decision - Evidence from an Emerging Market (Septemeber 2004). Available at SSRN: https://ssrn.com/abstract=669462 or http://dx.doi.org/10.2139/ssrn.669462

Jijo Lukose P. J. (Contact Author)

Indian Institute of Management Kozhikode ( email )

IIMK Kozhikode
Kozhikode, Kerala, India,
KOZHIKODE, KY XXXXXX
India
+91-9497208290 (Phone)
+91-44-2827 9208 (Fax)

Narayan Rao Sapar

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM) ( email )

Powai
Mumbai 400076
India
+91-22-2576 7744 (Phone)
+91-22-2572 2872 (Fax)

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