Rights Offerings and Expropriation by Controlling Shareholders

We investigate rights issues and open offers in Hong Kong. We observe that the greater the severity of firms’ management‐agency problems, the more unfavourably shareholders tend to react, leading to more negative cumulative abnormal returns or rights forfeiture. Controlling shareholders do not forfeit rights, and may increase their percentage ownership at deep price discounts by underwriting rights offerings. Our results suggest that, although certain rights offerings can be described as value‐enhancing, many other rights offerings closely resemble the expropriation activities of controlling shareholders.     

Motivation and Performance of Seasoned Offerings by Closed-End Funds

We examine the motivation and performance of closed‐end funds that engage in seasoned public or rights offerings. We find that closed‐end funds are more motivated to engage in seasoned offerings when their shares exhibit a relatively high premium (compared to their corresponding NAV) and have a high degree of liquidity. We also find a significant negative valuation effect on average in response to seasoned offerings by closed‐end funds. Our cross‐sectional analysis reveals that the valuation effect at the time of the seasoned offering is more unfavorable for funds that have relatively high expense ratios and are relatively large. Furthermore, we find that the closed‐end funds experience significant negative valuation effects over the three‐year period subsequent to the seasoned offering, implying poor post‐offering performance.     

Determinants of discounts in equity rights issues: An international comparison

Equity rights offerings are the predominant SEO flotation method in many European and Asian countries. Several previous studies focus on rights offerings, but these studies often measure solely the announcement effects of these offerings and pay little attention to the discount. This study seeks to close this gap, explain the discounts on such rights offerings, and determine the drivers of offering discounts with a focus on cultural effects regarding the level of uncertainty avoidance. Based on the existing literature, we develop several hypotheses and find supporting evidence for these hypotheses in our data. Our main finding is that the most important factors for explaining the discount on an equity rights offer are the level of uncertainty avoidance, the quality of a firm, and the level of uncertainty about firm value.     

Rights Offerings and Corporate Financial Condition

Certain American industrial firms still use equity rights offerings. Most of these offerings are uninsured. I examine firms' financing decisions, and develop the explanation that rights offerings are used by firms in financial distress with difficulty accessing underwriting services. These firms have little to lose from the costs of adverse selection that accompany the lack of underwriter certification of uninsured rights offerings. Probit analysis of 660 seasoned NYSE, Amex, and Nasdaq equity issues between 1983–1999 yields results consistent with my explanation. There is no evidence that variables previously linked to rights usage (e.g., ownership concentration) continue to be relevant to the issue method choice.     

Seasoned Equity Offerings: Stock Market Liquidity and the Rights Offer Paradox

This paper examines the impact of market liquidity on seasoned equity offerings (SEO) characteristics in France. We find that, besides blockholders’ takeup, liquidity is an important determinant of SEO flotation method choice. We document higher direct equity offering flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. After controlling for endogeneity in the choice of SEO flotation method, we find that pure public offerings and standby rights are comparable in terms of direct costs and liquidity improvement. Our results provide new insights as to why firms choose public offerings despite apparently higher costs.     

Seasoned Equity Issues in a Closely Held Market: Evidence from France

This paper examines seasoned equity offerings in France.Even though a rights offering is the primary flotation method, French companies are increasingly usingthe relatively expensive public offering method. We show that the market reaction to the announcementof seasoned equity issues is significantly negative for rights issues and insignificantly negative forpublic offerings. Our results suggest that the adverse selection effect is greater for rights issues thanfor public offerings, due to stronger underwriter certification for the public offerings. We find that theshare price effect is positively related to blockholders take-up renouncements for firms with priorconcentrated ownership. For these firms, the favourable ownership dispersion effect offsets the adverse selection effect.     

The demise of the rights issue

This article suggests that the lack of use of rights offeringsin the United States, a phenomenon referred to as the equityunderwriting paradox, can be explained by transaction-cost conditions.A sample of underwritten rights offerings provides support forthe explanation. Firms making underwritten rights offeringspaid lower underwriter fees but incurred significantly largerprice drops just prior to the offering than did firms makingunderwritten public offerings. Further analysis reveals thatthe underwritten-rights-offering price concessions are a formof transaction cost that is not found in under-written publicofferings.     

Market reaction to “unsweetened” and “sweetened” rights offerings in an emerging European stock market

This research investigates the market reaction to both “unsweetened” (plain) and “sweetened” (with simultaneous distribution of bonus issues) rights offerings in the Istanbul Stock Exchange. Consistent with previous U.K. and U.S. evidence, although with larger magnitude, the announcement day abnormal returns for “unsweetened” rights offerings are negative and significant, suggesting that such issues convey unfavorable information about the future operating performance, investment opportunities, liquidity and dividend policy. In contrast, for “sweetened” rights offerings, the abnormal returns are positive. The empirical results do not provide evidence for the enhanced trading liquidity effect (the “sweetener” split effect) and for the overvaluation signaling effect.     

Seasoned Equity Issues in a Closely Held Market: Evidence from France

This paper examines seasoned equity offerings in France. Eventhough a rights offering is the primary flotation method, Frenchcompanies are increasingly using the relatively expensive publicoffering method. We show that the market reaction to the announcementof seasoned equity issues is significantly negative for rightsissues and insignificantly negative for public offerings. Ourresults suggest that the adverse selection effect is greaterfor rights issues than for public offerings, due to strongerunderwriter certification for the public offerings. We findthat the share price effect is positively related to blockholderstake-up renouncements for firms with prior concentrated ownership.For these firms, the favourable ownership dispersion effectoffsets the adverse selection effect. JEL Classification: G32,G14 and D80.     

The Effect of Shareholder Approval of Equity Issuances Around the World

Mandatory shareholder approval of equity issuances varies considerably across and within countries. In the United States and a few other countries, management typically needs the approval of only its board of directors to issue common stock. In most countries, however, by law or stock exchange rule, shareholders must vote to approve equity issuances when using certain methods or contemplating offers that exceed a specified fraction of outstanding shares. In some countries, shareholders must approve all equity issuances. Even in the United States, shareholder approval is mandatory under certain circumstances. The differences in the stock market reaction to shareholder‐approved equity issuances and to issues undertaken unilaterally by management are strikingly and consistently large. When shareholders approve stock issuances, whether public or rights offerings, or private placements, the average announcement returns are significantly positive, on the order of 2%. But when managers issue stock without shareholder approval, as in the case of U.S. public offerings, returns are significantly negative and 4% lower, on average, than for shareholder‐approved issues. What's more, the closer in time the shareholder vote is to the issue date, and the greater the required plurality (say, two‐thirds instead of half the vote required for approval), the more positive is the market reaction to the issue—and these findings hold for each of the three main kinds of offerings that take place in all 23 countries in the author's sample. Also telling, in countries where shareholder approval is required, such as Sweden and Malaysia, rights offers predominate over public issues. But in countries like the U.S. and Japan, where managers may generally issue stock without shareholder approval, public offers predominate over rights issues. These findings suggest that agency problems—the tendency of corporate managements to put their own interests before their shareholders'—play a major role in equity issuances. Such findings are also largely inconsistent with the adverse selection, market timing, and signaling explanations that currently dominate academic thinking about equity issuances by public corporations.     

The information content of insider trading around seasoned equity offerings

This paper examines insider trading around seasoned equity offering (SEO) announcements in Hong Kong. The announcements of private placings (rights offerings) are associated with positive (negative) abnormal stock returns. However, longer-term stock returns are negative for both private placings and rights offerings. In general, insiders are net purchasers in placing firms in the 6 months prior to and 6 months subsequent to the SEO, whereas insiders are net sellers in rights issue firms in the 6 months prior to and 6 months subsequent to the issue. The net purchases made by the insiders of firms making placements help them maintain their control rights, which are otherwise diluted by the placements. Insider trading does not explain longer-term investment returns.     

The Quasi-split Effect, Active Insiders and the Italian Market Reaction to Equity Rights Issues

The positive market reaction at the announcement of most European rights issues can be explained by two major factors which distinguish them from a US public offering: active insiders, and a quasi-split effect which signals a large increase in the dividend yield. An analysis of 428 Italian rights offerings and an event study involving 82 observations in the 1980–94 period show that Italian insiders are completely 'active', and almost 85 % of the equity rights issues result in a dividend yield increase, which corresponds to the quasi-split effect in approximately 40 % of the issues. The dividend yield rises, on average, by a significant +61 % after a combined rights offering and by a significantly lower +20 % following a fully-paid rights issue. The market reaction to the announcement is significantly positive for combined rights offerings (+ 2.77 %) and positive, but not significant, for the whole sample (+ 0.79 %). The dividend increase signalled by the quasi-split effect explains almost 30 % of the abnormal returns' cross-sectional variation and it is the only significant explanatory variable.     

An analysis of the share price and accounting performance of rights offerings in China

This study examines both the short- and long-term share price and accounting performance of Chinese rights issues. Employing data from 432 rights offerings issued between 1994 and 1999, the study documents a statistically significant positive abnormal stock return of 4.8% on the ex-date. Over the long run, rights issuing firms significantly outperform control portfolios of firms matched on the basis of size, the book-to-market ratio, and both size and the book-to-market ratio. Similar to the case of U.S. experience, investors in China appear to underreact to the initial announcements of new equity offerings, but in the opposite direction. Interestingly, although firms issuing rights generally underperform their non-issuing peers in important operating performance metrics such as return on assets, their growth rates of sales and capital expenditures far outstrip non-issuers. Finally, the findings document that changes in the long-term stock performance of rights issuing firms are positively correlated with changes in post issue accounting performance.     

Stock offerings in a different institutional setting: The Swiss case, 1973–1983

This paper analyzes the stock price effect of equity issues in Switzerland. There, insiders are not legally prevented from using their information for personal trades, and security offerings are with almost no exception rights issues. Unlike what we find for a comprehensive sample of U.S. rights issues and a sample of U.S. general cash offerings, a significant majority of firms experiences a positive monthly announcement effect. The average abnormal return itself, however, is not significant. Also, we find evidence inconsistent with infinitely price-elastic demand functions for common stock, as well as some evidence that offer prices convey new information.     

Bribe payments under regulatory decentralization: Evidence from rights offering regulations in China

This paper investigates why and how firms’ bribe payments vary as a result of the interaction between firms and local public officials under the decentralized regulatory system for rights offerings implemented prior to 2001 in China. Using the gap between the estimated and reported total direct costs of rights offerings as a measure of firms’ bribes payments in the process of rights offering applications under this system, we find that bribe payments are positively related to local governments’ control rights, firms’ opportunity costs of refusing to pay bribes, and the severity of firms’ Jensen agency problems. We further show that after termination of the regulatory system, firms’ bribe payments are substantially reduced, and local governments’ control rights as well as the severity of firms’ Jensen agency problems can no longer explain the variation in bribe payments.