Why Do Firms Issue Equity? Right Issues in the Closed-End Funds Industry

Posted: 22 Apr 1998

See all articles by Ajay Khorana

Ajay Khorana

Georgia Institute of Technology - Finance Area

Sunil Wahal

Arizona State University (ASU) - Finance Department

Marc Zenner

Citigroup, Inc. - Investment Banking Division

Date Written: August 1997

Abstract

We study 67 rights offerings by closed-end funds over 1988-1994 and gauge their impact on the fund's shareholders and managers. We find that funds conduct rights offerings while they are trading at a premium, reverts to a discount after the offering. Theories of asymmetric information about assets-in-place, growth and investment opportunities as well as downward sloping demand curves have little explanatory power in explaining the premium decline. Our proxies for managerial opportunism suggest that premium declines are related to agency problems between investment advisors and shareholders. Indeed, rights offerings result in a substantial increase in investment advisory fees.

JEL Classification: G31, G32

Suggested Citation

Khorana, Ajay and Wahal, Sunil and Zenner, Marc, Why Do Firms Issue Equity? Right Issues in the Closed-End Funds Industry (August 1997). Available at SSRN: https://ssrn.com/abstract=78669

Ajay Khorana (Contact Author)

Georgia Institute of Technology - Finance Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5110 (Phone)
404-894-6030 (Fax)

Sunil Wahal

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Marc Zenner

Citigroup, Inc. - Investment Banking Division ( email )

Salomon Smith Barney
388 Greenwich St., 24th Flr
New York, NY 10013
United States

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