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The Pricing and Impact of Rights Issues of Equity in Australia

39 Pages Posted: 12 Sep 2007  

Sian A. Owen

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Jo-Ann Suchard

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

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.

Keywords: Rights issues, underpricing, announcement effect

JEL Classification: G14, G32

Suggested Citation

Owen, Sian A. and Suchard, Jo-Ann, The Pricing and Impact of Rights Issues of Equity in Australia. Applied Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1011541

Sian A. Owen (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jo-Ann Suchard

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
61 2 9385 5876 (Phone)
61 2 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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