Why Do Firms Issue Equity? Right Issues in the Closed-End Funds Industry
Posted: 22 Apr 1998
Date Written: August 1997
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: Suggested Citation