The Choice of SEO Method in Korea: Rights vs. Public Offers

Abstract

This study examines the factors in the flotation method choice, rights issues vs. public offers, in a firm’s seasoned equity offering process. Using Korean data during 2000~2015, we find that firms with less information asymmetry and larger issue size are more likely to choose rights over public offers and that control considerations also affect the flotation choice. Contrary to the majority of evidence in the literature, rights offers are met with more negative announcement returns than public offers in Korea. This seemingly atypical phenomenon can be linked to the heavy discounts of rights offers. We document that stockholders of rights issue firms seem to be compensated for the initial adverse market reaction by large issue-day returns. We contribute to the literature with an intra-market analysis of the SEO method choice, which cannot be done in markets with a dominant flotation type.

Keywords: Seasoned equity offerings, Flotation method, Rights issues, Public offers, Intra-market analysis

JEL Classification: G30