A Rent Protection Explanation for SEO Flotation Method Choice
58 Pages Posted: 22 Jun 2014
There are 3 versions of this paper
A Rent Protection Explanation for SEO Flotation Method Choice
A Rent Protection Explanation for SEO Flotation Method Choice
A Rent-Protection Explanation for SEO Flotation-Method Choice
Date Written: June 6, 2014
Abstract
We model how a rent-protection motive drives the choice of flotation method in new equity issuance between two polar cases: rights issues and cash offers. Unexpected new blockholders would emerge in control-diluting cash offers and share in jealously guarded control benefits. But rights issues help the incumbent controlling shareholders avoid control dilution and safeguard their private benefits. Under asymmetric information about private benefits, the choice of flotation method can convey information about hidden private benefits and hence firm value. Our model can explain even a negative announcement effect of rights issues, and supports not just one but three important equilibriums.
Keywords: Rights Issue, SEO, Flotation Method Choice, Private Benefits of Control, Rent Protection
JEL Classification: G14, G32, G34
Suggested Citation: Suggested Citation