Equity Issuance Methods and Dilution

39 Pages Posted: 20 Jun 2018 Last revised: 14 Oct 2018

See all articles by Mike Burkart

Mike Burkart

Swedish House of Finance; London School of Economics and Political Science, Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Hongda Zhong

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: October 8, 2018

Abstract

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.

Suggested Citation

Burkart, Mike C. and Zhong, Hongda, Equity Issuance Methods and Dilution (October 8, 2018). Available at SSRN: https://ssrn.com/abstract=3189842 or http://dx.doi.org/10.2139/ssrn.3189842

Mike C. Burkart

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

London School of Economics and Political Science, Department of Finance ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/default_static.htm

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Hongda Zhong (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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