Shareholder Nonparticipation in Valuable Rights Offerings

Abstract

Shareholder participation in domestic rights offerings averages only 64%, which is considerably lower than previously thought. This causes wealth transfers from nonparticipating to participating shareholders which average 7% of the value of the offering. Wealth transfers are larger in nontransferable, larger offerings. Offerings with lower shareholder participation tend to fall short in raising the capital sought. The stock market reacts more negatively to offerings with higher wealth transfers. It appears that small, non-sophisticated shareholders are less likely to participate. International evidence reveals that rights offerings are more prevalent in countries with institutional practices that limit such wealth transfers among shareholders.

Keywords: rights offering, shareholder heterogeneity, wealth transfers

JEL Classification: G32, G24, G15