What's wrong with rights?

Publication Type

Working Paper

Publication Date

2012

Abstract

We investigate a failure cost hypothesis of equity flotation mechanism choice, in which the expected failure cost of non-underwritten rights offerings influences the underwriting decision. Although issuers can, in theory, completely self-insure these offerings with a sufficiently low subscription price, we find evidence consistent with constraints in subscription price-setting - subscription price signals project quality, and the propensity to underwrite is decreasing in expected overall takeup. We also find that firm ownership concentration is inversely related to the likelihood of underwriting only because of its positive relation with subscription precommitment, a supplementary insurance mechanism. These results support the failure cost hypothesis as a potential explanation for the rights issue paradox.

Keywords

Rights, Paradox, Failure, Seasoned equity offerings

Discipline

Finance and Financial Management

Research Areas

Finance

Identifier

10.2139/ssrn.1698626

Comments

Received revise-and-resubmit decision at the Journal of Financial and Quantitative Analysis

Link to Full Text

Share

COinS