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Equity issuance methods and dilution

Author

Listed:
  • Burkart, Mike
  • Zhong, Hongda

Abstract

We analyze rights and public offerings when informed shareholders strategically choose to subscribe. Absent wealth constraints, rights offerings achieve the full information outcome and dominate public offerings. When some shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights. In both rights and public offerings, there is a trade-off between investment efficiency and wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low types opt for rights offerings, while intermediate types select public offerings.

Suggested Citation

  • 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.
    • Handle: RePEc:ehl:lserod:117895
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    File URL: http://eprints.lse.ac.uk/117895/
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    ES/S016686/1; ES/T003758/1; OUP deal;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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