Equity Issuance Methods and Dilution
39 Pages Posted: 20 Jun 2018 Last revised: 14 Oct 2018
Date Written: October 8, 2018
We analyze rights offerings and public offerings in a setting where better informed current shareholders strategically choose to subscribe. When all current shareholders have wealth to participate, rights offerings achieve the full information outcome and dominate public offerings. When some current shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the extra income from selling these rights. When firms can choose the floatation method, either all firms choose the same offer method or high and low quality firms opt for rights offerings while firms of intermediate quality select public offerings.
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