Motivations that underlie the subscription prices in common stocks rights offerings: public utilities

Majed Muhtaseb

Applied Economics Letters, 1996, vol. 3, issue 3, 201-204

Abstract: The objective of this letter is to test the competing predictions of the Heinkel and Schwartz model, in which a higher subscription in a Common Stock Rights Offering price signals a higher quality firm, and the Myers and Majluf model in which the firm sets a low subscription price in order to secure the financing for a positive NPV project from the firm's existing stockholders. For a sample of 105 public utilities, the two-day offering period cumulative abnormal return, the dependent variable, is estimated using standard event study methodology. The independent variable is the relative subscription price, defined as the ratio of the subscription price to the mean of closing prices of the five trading days immediately preceding the two-day offering period. The results indicate that there are public utilities whose financing decision complies with the predictions of the Heinkel and Schwartz model and others whose financing activity acts according to the predictions of the Myers and Majluf model. Finally, the explanatory power of either model is generally minimal pointing towards the presence of other factors, in addition to securing the financing of a project and signalling the quality of the firm, that determine the subscription price in a common stock rights offering.

Date: 1996
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.informaworld.com/openurl?genre=article& ... 40C6AD35DC6213A474B5 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apeclt:v:3:y:1996:i:3:p:201-204

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEL20

DOI: 10.1080/135048596356690

Access Statistics for this article

Applied Economics Letters is currently edited by Anita Phillips

More articles in Applied Economics Letters from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().