Equity Issuance Methods and Dilution

73 Pages Posted: 20 Jun 2018 Last revised: 31 Mar 2021

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: March 24, 2021

Abstract

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

Burkart, Mike C. and Zhong, Hongda, Equity Issuance Methods and Dilution (March 24, 2021). European Corporate Governance Institute – Finance Working Paper No. 636/2019, 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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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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