The Choice between Rights-Preserving Issue Methods. Regulatory and Financial Aspects of Issuing Seasoned Equity in the UK

45 Pages Posted: 24 Mar 2003  

Arthur G. Korteweg

University of Southern California - Marshall School of Business

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Date Written: March 2003

Abstract

This paper examines the choice between two rights-preserving issue methods of seasoned equity offers in the UK as well as the factors determining the offer price and stock market announcement reactions. Firstly, equity issues in the UK are underwritten for different reasons than in other countries. Only severely financially distressed companies choose not to underwrite their share offer. Second, the average announcement reaction to non-underwritten issues is much more negative than to underwritten issues. This contrasts sharply with the results found in other countries, such as the US. Third, underwritten rights issues experience a negative announcement return whereas the share price reaction to underwritten open offers is positive. The choice of issue method and the subsequent announcement reaction are explained by directors' and institutional investors' interests, growth opportunities, stock market uncertainty and liquidity in the market for rights.

Keywords: seasoned equity, rights issue, open offer, capital structure, financial distress

JEL Classification: G3, G33, G34

Suggested Citation

Korteweg, Arthur G. and Renneboog, Luc, The Choice between Rights-Preserving Issue Methods. Regulatory and Financial Aspects of Issuing Seasoned Equity in the UK (March 2003). ECGI - Finance Working Paper No. 15/2003. Available at SSRN: https://ssrn.com/abstract=389001 or http://dx.doi.org/10.2139/ssrn.389001

Arthur G. Korteweg

University of Southern California - Marshall School of Business ( email )

3670 Trousdale Parkway
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~korteweg/

Luc Renneboog (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

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

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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