Why Do Firms Choose Value-Destroying Rights Offerings? Theory and Evidence from Hong Kong
52 Pages Posted: 21 Mar 2002
Date Written: February 2002
In contrast to value-enhancing equity placements, rights offerings create appalling announcement effects (-7.6 percent) in Hong Kong. This phenomenon is the reverse of that observed in the U.S., deepening the rights-offer puzzle. We argue that control-diluting placements may enable intruders to gain sufficient votes to share in the private benefits and hence cause an expected loss of private benefits to controlling shareholders. In contrast, rights offerings do not cause control dilution. As a result, the asymmetric information about control value between the incumbent/corporate intruders and the market creates a separating equilibrium in which rights offering (placement) signals high (low) private benefits of control. Our theory suggests that managers/controlling shareholders are willing to bear a substantial value loss on their own equity holdings in rights issues to protect control value. We provide empirical evidence in support of the theory.
Keywords: Flotation Method, Rights Offering, Announcement Effect, Signaling, Private Benefits of Control, Control Value
JEL Classification: G14, G32, G34
Suggested Citation: Suggested Citation