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Financial intermediation and the rights offer paradox

  • Koenig-Matsoukis, Laure
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    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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    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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    1. 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.
    2. Robert S. Hansen, 1988. "The Demise of the Rights Issue," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 289-309.
    3. 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.
    4. Edith Ginglinger & Jean-François Gajewski, 2002. "Seasoned equity issues in a closely held market: evidence from France," Post-Print halshs-00138293, HAL.
    5. 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.
    6. Riva, Fabrice & Ginglinger, Edith & Koenig-Matsoukis, Laure, 2009. "Stock market liquidity and the rights offer paradox," Economics Papers from University Paris Dauphine 123456789/3035, Paris Dauphine University.
    7. 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.
    8. 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.
    9. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Order Imbalance, Liquidity, and Market Returns," University of California at Los Angeles, Anderson Graduate School of Management qt7gh9t9w3, Anderson Graduate School of Management, UCLA.
    10. 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.
    11. Singh, Ajai K., 1997. "Layoffs and underwritten rights offers," Journal of Financial Economics, Elsevier, vol. 43(1), pages 105-130, January.
    12. 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.
    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. 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.
    15. 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.
    16. 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.
    17. Marsh, Paul, 1980. " Valuation of Underwriting Agreements for UK Rights Issues," Journal of Finance, American Finance Association, vol. 35(3), pages 693-716, June.
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