Rights issues versus private placements: theory and UK evidence
AbstractUK companies and their shareholders have increasingly opted to have newly issued shares privately placed rather than selling them via a rights issue. We present a model of a choice between these two methods. We see rights issue as similar to the type of issue envisaged by Myers and Majluf (1984), in which information assymetry exists until after the shares are sold. In contrast, the placement process is assumed to enable potential placees to investigate the value of the issuer, and to reveal the true value via the placement price as in Hertzel and Smith (1993). The model yields several testable predictions which are strongly supported by the evidence from a large sample of seasoned equity offers.
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Bibliographic InfoPaper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 87.
Date of creation: Mar 2004
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-14 (All new papers)
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- Hansen, Robert S & Torregrosa, Paul, 1992. " Underwriter Compensation and Corporate Monitoring," Journal of Finance, American Finance Association, vol. 47(4), pages 1537-55, September.
- Marco Bigelli, 1998. "The Quasi-split Effect, Active Insiders and the Italian Market Reaction to Equity Rights Issues," European Financial Management, European Financial Management Association, vol. 4(2), pages 185-206.
- Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-85, June.
- 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.
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