Discounts in Placing Pre-Renounced Shares in Rights Issues
Journal of Business Finance & Accounting, Vol. 34, pp. 1345-1369, 2007
42 Pages Posted: 14 May 2011
Date Written: September 1, 2007
Abstract
The paper presents evidence from UK rights issues on the discounts at which large blocks of new shares plus rights are sold. The shares are renounced by the shareholders entitled to them and placed with passive investors at substantial discounts of around 8% to the expected ex-rights midpoint price of the existing shares. Tests indicate that the discounts arise because of uncertainty about issuer value and inelastic demand for the shares rather than because the issuing companies are overvalued. The finding that selling renounced shares is costly removes an apparent advantage of rights issues compared with open offers and private placings.
Keywords: rights issues, open offers, private placings, offer-price discounts, long-run abnormal returns
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