A Rent-Protection Explanation for SEO Flotation-Method Choice

Posted: 30 Aug 2016

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: August 30, 2013

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 it supports not just one but three important equilibriums.

Suggested Citation

Wu, Xueping and Wang, Zheng and Yao, Jun, A Rent-Protection Explanation for SEO Flotation-Method Choice (August 30, 2013). Journal of Financial and Quantitative Analysis (JFQA), Vol. 51, No. 3, 2016, Available at SSRN: https://ssrn.com/abstract=2831897

Xueping Wu (Contact Author)

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

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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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