Why Do Firms Choose Value-Destroying Rights Offerings? Theory and Evidence from Hong Kong

52 Pages Posted: 21 Mar 2002

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

Date Written: February 2002

Abstract

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

Wu, Xueping and Wang, Zheng, Why Do Firms Choose Value-Destroying Rights Offerings? Theory and Evidence from Hong Kong (February 2002). Available at SSRN: https://ssrn.com/abstract=302618 or http://dx.doi.org/10.2139/ssrn.302618

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

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