The Pricing and Impact of Rights Issues of Equity in Australia

Abstract:     
We investigate abnormal returns resulting from the announcement of a rights issue of equity in Australia and are the first study outside the U.S and the U.K to examine the pricing of rights issues and the determinants of that pricing. Rights issues are met with a significantly negative abnormal return and, on average, are priced at a discount. The determinants of the announcement effect are analysed using a two stage approach to control for the endogeneity of the price discount. We first estimate the predicted discount and then include it as an independent variable in the announcement effect regression. The discount is positively related to the offer size and negatively related to underwriter quality, supporting underwriter certification models. We also include variables that have not been tested in any market, such as shareholder concentration which is negatively related to the price discount implying that firms with higher shareholder concentration do not offer a significant discount as their shareholders wish to maintain their percentage holding in the firm. Further, we analyse the determinants of the abnormal returns and find a negative relationship with the predicted issue price discount, and a positive relationship with the use of proceeds. Finally we find that announcements made by resource firms generate larger negative reactions than other issuers.

Number of Pages in PDF File: 39

Keywords: Rights issues, underpricing, announcement effect

JEL Classification: G14, G32

Accepted Paper Series