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Why Underwrite Rights Offers? Some New Evidence

Journal of Financial Economics, Vol. 46, pp. 223-261, 1997

49 Pages Posted: 28 Oct 2008  

Øyvind Bøhren

BI Norwegian Business School - Department of Finance

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Dag Michalsen

BI Norwegian Business School

Abstract

We examine rights issues on the Oslo Stock Exchange, where seasoned public offerings now take place almost exclusively through use of the relatively expensive standby underwriting method rather than unsinsured rights. We show that the propensity to use standby underwriting increases as expected shareholder takeup decreases, that the market reaction to uninsured rights offers is significantly positive, and that standbys elicit the least favorable market reaction to the public issue announcement. These and other cross-sectional results are consistent with the asymmetric information framework of Eckbo and Masulis (1992) and help resolve the longstanding rights offer paradox.

Keywords: Rights offer, standby underwriting, seasoned equity offer, flotation costs, shareholder takeup, adverse selection

JEL Classification: G32

Suggested Citation

Bøhren, Øyvind and Eckbo, B. Espen and Michalsen, Dag, Why Underwrite Rights Offers? Some New Evidence. Journal of Financial Economics, Vol. 46, pp. 223-261, 1997. Available at SSRN: https://ssrn.com/abstract=1288772 or http://dx.doi.org/10.2139/ssrn.1288772

Øyvind Bøhren

BI Norwegian Business School - Department of Finance ( email )

N-0442 Oslo
Norway

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( 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

Dag Michalsen

BI Norwegian Business School ( email )

Nydalsveien 37
N-0442 Oslo, N-0442
Norway
4746410512 (Phone)

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