Abstract

References (59)

Beta

Citations (58)

Beta

Download | Share | Email | Add to Briefcase | Buy Hard Copy

Adverse Selection and the Rights Offer Paradox

B. Espen Eckbo
Dartmouth College - Tuck School of Business; European Corporate Governance Institute (ECGI)

Ronald W. Masulis
Vanderbilt University - Owen Graduate School of Management; Vanderbilt University - School of Law

Journal of Financial Economics (JFE), Vol. 32, No. 3, pp. 293-332, 1992

Abstract:
We develop an analytical framework to explain a firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current shareholder takeup of issues are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse selction effects when shareholder takeup is low. Implications for stock price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large sample evidence.

Keywords: Flotation method, seasoned common stock, SEO, stock offer, rights offer, adverse selection

JEL Classifications: G24

Accepted Paper Series

Date posted: June 19, 2006 ; Last revised: June 19, 2006

Suggested Citation

Eckbo, B. Espen and Masulis, Ronald W., Adverse Selection and the Rights Offer Paradox. Journal of Financial Economics (JFE), Vol. 32, No. 3, pp. 293-332, 1992. Available at SSRN: http://ssrn.com/abstract=908963

Export to: Export Citation What's this?

Contact Information

Ronald W. Masulis (Contact Author) Vanderbilt University - Owen Graduate School of Management ( email ) 401 21st Avenue South Nashville, TN 37203 United States 615-322-3687 (Phone) 615-343-7177 (Fax)
Vanderbilt University - School of Law 131 21st Avenue South Nashville, TN 37203-1181 United States
B. Espen Eckbo Dartmouth College - Tuck School of Business ( email ) Hanover, NH 03755 United States 603-646-3953 (Phone) 603-646-3805 (Fax) HOME PAGE: http://www.tuck.dartmouth.edu/eckbo
European Corporate Governance Institute (ECGI) c/o ECARES ULB CP 114 B-1050 Brussels Belgium