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Cheap-stock tunneling around preemptive rights

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  • Fried, Jesse M.
  • Spamann, Holger

Abstract

Preemptive rights are thought to protect minority shareholders from cheap-stock tunneling by a controlling shareholder. We show that preemptive rights, while making cheap-stock tunneling more difficult, cannot prevent it when asymmetric information about the value of the offered shares makes it impossible for the minority to know whether these shares are cheap or overpriced. Our analysis can help explain why sophisticated investors in unlisted firms and regulators of listed firms do not rely entirely on preemptive rights to address cheap-stock tunneling, supplementing them with other restrictions on equity issues.

Suggested Citation

  • Fried, Jesse M. & Spamann, Holger, 2020. "Cheap-stock tunneling around preemptive rights," Journal of Financial Economics, Elsevier, vol. 137(2), pages 353-370.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:2:p:353-370
    DOI: 10.1016/j.jfineco.2020.03.001
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    References listed on IDEAS

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    Cited by:

    1. Hunold, Matthias & Petrishcheva, Vasilisa, 2022. "Foreclosure and tunneling with partial vertical ownership," DICE Discussion Papers 391, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Atif Ellahie & Zachary Kaplan, 2021. "Show Me the Money! Dividend Policy in Countries with Weak Institutions," Journal of Accounting Research, Wiley Blackwell, vol. 59(2), pages 613-655, May.
    3. Matthias Hunold & Vasilisa Petrishcheva, 2022. "Foreclosure and Tunneling with Partial Vertical Ownership," CEPA Discussion Papers 57, Center for Economic Policy Analysis.
    4. Burkart, Mike & Zhong, Hongda, 2023. "Equity issuance methods and dilution," LSE Research Online Documents on Economics 117895, London School of Economics and Political Science, LSE Library.
    5. Fried, Jesse M. & Kamar, Ehud & Yafeh, Yishay, 2020. "The effect of minority veto rights on controller pay tunneling," Journal of Financial Economics, Elsevier, vol. 138(3), pages 777-788.
    6. Mike Burkart & Hongda Zhong, 2023. "Equity Issuance Methods and Dilution," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(1), pages 78-130.

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    More about this item

    Keywords

    Controlling shareholder; Tunneling; Preemptive rights; Rights offer; Equity issuance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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