Costly Self‐Insurance of Rights Offerings

31 Pages Posted: 20 Jan 2016

See all articles by Truong X. Duong

Truong X. Duong

Iowa State University - Department of Accounting and Finance

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management

Eng-Joo Tan

Singapore Management University - Lee Kong Chian School of Business

Date Written: November/December 2015

Abstract

We study how the underwriting decision of an equity rights offering is affected by the risk of offering failure. Firms can reduce failure risk by getting underwriting or by self‐insuring through subscription price discounts and subscription precommitments. Self‐insurance is generally regarded to be relatively costless, but we provide evidence from Singapore that is consistent with the existence of implicit costs. In particular, the existence of self‐insurance costs implies that firms with better projects will have larger discounts and that firms with higher ownership concentration will have more precommitments. Hence, our results support costly self‐insurance against issue failure as a factor in explaining the rights issue paradox.

Keywords: rights, paradox, failure, seasoned equity offerings

Suggested Citation

Duong, Truong X. and Singh, Rajdeep and Tan, Eng-Joo, Costly Self‐Insurance of Rights Offerings (November/December 2015). Journal of Business Finance & Accounting, Vol. 42, Issue 9-10, pp. 1251-1281, 2015, Available at SSRN: https://ssrn.com/abstract=2718653 or http://dx.doi.org/10.1111/jbfa.12168

Truong X. Duong (Contact Author)

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

Rajdeep Singh

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-1061 (Phone)
612-626-1335 (Fax)

HOME PAGE: http://umn.edu/~rajsingh

Eng-Joo Tan

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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