What's wrong with rights?

• Main Authors: Duong, Truong, Singh, Rajdeep, TAN, Eng Joo
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Rights; Paradox; Failure; Seasoned equity offerings; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3284; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1698626
• Institution: Singapore Management University

We investigate a failure cost hypothesis of equity flotation mechanism choice, in which the expected failure cost of non-underwritten rights offerings influences the underwriting decision. Although issuers can, in theory, completely self-insure these offerings with a sufficiently low subscription price, we find evidence consistent with constraints in subscription price-setting - subscription price signals project quality, and the propensity to underwrite is decreasing in expected overall takeup. We also find that firm ownership concentration is inversely related to the likelihood of underwriting only because of its positive relation with subscription precommitment, a supplementary insurance mechanism. These results support the failure cost hypothesis as a potential explanation for the rights issue paradox.