Abstract

https://ssrn.com/abstract=908963
 
 

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Adverse Selection and the Rights Offer Paradox


B. Espen Eckbo


Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Ronald W. Masulis


University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)


Journal of Financial Economics (JFE), Vol. 32, No. 3, pp. 293-332, 1992

Abstract:     
We develop an analytical framework to explain a firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current shareholder takeup of issues are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse selction effects when shareholder takeup is low. Implications for stock price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large sample evidence.

Number of Pages in PDF File: 49

Keywords: Flotation method, seasoned common stock, SEO, stock offer, rights offer, adverse selection

JEL Classification: G24


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Date posted: June 19, 2006  

Suggested Citation

Eckbo, B. Espen and Masulis, Ronald W., Adverse Selection and the Rights Offer Paradox. Journal of Financial Economics (JFE), Vol. 32, No. 3, pp. 293-332, 1992. Available at SSRN: https://ssrn.com/abstract=908963

Contact Information

B. Espen Eckbo
Tuck School of Business at Dartmouth ( email )
Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)
HOME PAGE: http://www.tuck.dartmouth.edu/eckbo
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Ronald W. Masulis (Contact Author)
University of New South Wales - Australian School of Business ( email )
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )
BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore
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