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Financial intermediation and the rights offer paradox

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  • Koenig-Matsoukis, Laure
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    Abstract

    In this study, we investigate the trading dynamics around rights issues. We employ signed and unsigned trading activity measures in order to provide evidence of costly financial intermediation. We, first, document short selling activity by underwriters and shareholders during rights issues leading to significant negative abnormal returns during the offer. Further, we provide evidence that rights tend to be sold below their fair value. Our results, therefore, suggest that the lack of use of rights offering, referred to as the rights offer paradox can be explained by indirect costs related to the nature of constraints confronting underwriters and shareholders but also to trading mistakes on the rights market.

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    File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/4430/1/SSRN-id1576307.pdf
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    Bibliographic Info

    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/4430.

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    Date of creation: Aug 2010
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    Handle: RePEc:dau:papers:123456789/4430

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    Related research

    Keywords: SEO; Security offering; rights issues; flotation method; financial intermediation; order imbalance;

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    1. Galai, Dan & Schneller, Meir I, 1978. "Pricing of Warrants and the Value of the Firm," Journal of Finance, American Finance Association, vol. 33(5), pages 1333-42, December.
    2. Marsh, Paul, 1980. " Valuation of Underwriting Agreements for UK Rights Issues," Journal of Finance, American Finance Association, vol. 35(3), pages 693-716, June.
    3. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2002. "Order imbalance, liquidity, and market returns," Journal of Financial Economics, Elsevier, vol. 65(1), pages 111-130, July.
    5. Robert S. Hansen, 1988. "The Demise of the Rights Issue," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 289-309.
    6. Hietala, Pekka T., 1994. "The efficiency of the Finnish market for right issues," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 895-920, October.
    7. Sahn-Wook Huh & Avanidhar Subrahmanyam, 2005. "Order Flow Patterns around Seasoned Equity Offerings and their Implications for Stock Price Movements-super-," International Review of Finance, International Review of Finance Ltd., vol. 5(1-2), pages 75-111.
    8. Henker, Thomas & Wang, Jian-Xin, 2006. "On the importance of timing specifications in market microstructure research," Journal of Financial Markets, Elsevier, vol. 9(2), pages 162-179, May.
    9. Elias Rantapuska & Samuli Knüpfer, 2008. "Which Investors Leave Money on the Table? Evidence from Rights Issues," Review of Finance, European Finance Association, vol. 12(4), pages 701-733.
    10. Eckbo, B. Espen & Masulis, Ronald W., 1992. "Adverse selection and the rights offer paradox," Journal of Financial Economics, Elsevier, vol. 32(3), pages 293-332, December.
    11. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
    12. Cronqvist, Henrik & Nilsson, Mattias, 2005. "The choice between rights offerings and private equity placements," Journal of Financial Economics, Elsevier, vol. 78(2), pages 375-407, November.
    13. Poitras, Geoffrey, 2002. "Short sales restrictions, dilution and the pricing of rights issues on the Singapore Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 10(2), pages 141-162, April.
    14. Edith Ginglinger & Jean-François Gajewski, 2002. "Seasoned equity issues in a closely held market: evidence from France," Post-Print halshs-00138293, HAL.
    15. Singh, Ajai K., 1997. "Layoffs and underwritten rights offers," Journal of Financial Economics, Elsevier, vol. 43(1), pages 105-130, January.
    16. Nickolaos V. Tsangarakis, 1996. "Shareholder Wealth Effects of Equity Issues in Emerging Markets: Evidence from Rights Offerings in Greece," Financial Management, Financial Management Association, vol. 25(3), Fall.
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