Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?
Journal of Business Finance and Accounting 41, 2014, pp. 743-72
50 Pages Posted: 1 Oct 2014 Last revised: 28 Mar 2016
Date Written: February 1, 2014
This paper investigates the large and diverse discounts in UK open offers and placings. Large discounts are a substantial cost to shareholders who do not buy new shares. The existing literature mainly examines US firm-commitment offers and private placements. The institutional setting differs in the UK, in ways that make the theory of inelastic demand for shares more important as an explanation for discounts than in the USA. The paper finds that inelastic demand, or illiquidity of the issuer’s shares, and financial distress, are key determinants of the discount. We expect these results to apply to other stock markets.
Keywords: seasoned equity offer; discount; inelastic demand; open offer; placing
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