Equity Issue Methods and Dilution

51 Pages Posted: 4 Dec 2019

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)

Date Written: November 2019

Abstract

We analyze rights offerings and public offerings when informed current shareholders strategically choose to subscribe. If all current shareholders have wealth to participate, rights offerings achieve the full information outcome and dominate public offerings. However, when some current shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights, thereby generating wealth transfers among shareholders. When firms can choose the flotation 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 Issue Methods and Dilution (November 2019). CEPR Discussion Paper No. DP14130. Available at SSRN: https://ssrn.com/abstract=3496619

Mike C. Burkart (Contact Author)

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

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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