A Rent Protection Explanation for SEO Flotation Method Choice

58 Pages Posted: 22 Jun 2014

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Zheng Wang

City University of Hong Kong (CityU) - Department of Economics & Finance

Jun Yao

Hong Kong Polytechnic University

Multiple version iconThere are 3 versions of this paper

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

Wu, Xueping and Wang, Zheng and Yao, Jun, A Rent Protection Explanation for SEO Flotation Method Choice (June 6, 2014). Available at SSRN: https://ssrn.com/abstract=2457331 or http://dx.doi.org/10.2139/ssrn.2457331

Xueping Wu (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Zheng Wang

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Jun Yao

Hong Kong Polytechnic University ( email )

Hung Hom, Kowloon
Hong Kong

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