Equity Issuance Methods and Dilution
73 Pages Posted: 20 Jun 2018 Last revised: 31 Mar 2021
Date Written: March 24, 2021
We analyze rights and public offerings when informed shareholders strategically choose to subscribe. Absent wealth constraints, rights offerings achieve the full information outcome and dominate public offerings. When some shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights. In both rights and public offerings, there is a trade-off between investment efficiency and wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low types opt for rights offerings while intermediate types select public offerings.
Keywords: Rights offerings, Public offerings, Asymmetric Information, Winner Curse
JEL Classification: G32
Suggested Citation: Suggested Citation