Do Rights Issues Really Protect Minorities? Empirical Evidence on the Italian Case

36 Pages Posted: 27 Feb 2007

See all articles by Michele Meoli

Michele Meoli

University of Bergamo

Stefano Paleari

University of Bergamo - SIGE Sezione di Ingegneria Gestionale

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK

Date Written: January 15, 2007

Abstract

This paper discusses the use of rights issues in a context where interest conflicts between controlling shareholders and minorities are due to the existence of private benefits that the former can extract from the value of a traded company. While the literature considers the issue of preemptive rights as an essential tool to protect minorities from expropriation, we propose a model where rights are used to enforce the subscription of seasoned equity issues, even at negative conditions for the market. We define an abuse condition, that allows a controlling shareholder to choose discretionally an issuing price, granting a discount with respect to the market price, so that minorities either undertake the issue or place the rights, minimizing an exit cost that is, in this case, greater than zero. As the rights issue never fails under these condition, we define this phenomenon as enforced subscription. An analysis of rights issues in Italy over the decade 1996-2005 follows, providing evidence of an abuse of rights issues carried out by companies in financial distress. As rights issues at a high discount often involve an abuse of power by the controlling shareholder, we argue that their use should be carefully regulated.

Keywords: Equity Issues, Rights Issues, Private Benefits, Minority Protection

JEL Classification: G32, G34

Suggested Citation

Meoli, Michele and Paleari, Stefano and Urga, Giovanni, Do Rights Issues Really Protect Minorities? Empirical Evidence on the Italian Case (January 15, 2007). Available at SSRN: https://ssrn.com/abstract=965738 or http://dx.doi.org/10.2139/ssrn.965738

Michele Meoli (Contact Author)

University of Bergamo ( email )

Via Marconi 5
24044 Dalmine, Bergamo
Italy
+390352052026 (Phone)
+390352052077 (Fax)

Stefano Paleari

University of Bergamo - SIGE Sezione di Ingegneria Gestionale ( email )

Via Marconi 5
24044 Dalmine, Bergamo
Italy
+39 03 520 52340 (Phone)
+39 03 556 2779 (Fax)

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK ( email )

108 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 8698 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/giovanni-urga

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