Cheap-stock tunneling around preemptive rights

Jesse M. Fried and Holger Spamann

Journal of Financial Economics, 2020, vol. 137, issue 2, 353-370

Abstract: Preemptive rights are thought to protect minority shareholders from cheap-stock tunneling by a controlling shareholder. We show that preemptive rights, while making cheap-stock tunneling more difficult, cannot prevent it when asymmetric information about the value of the offered shares makes it impossible for the minority to know whether these shares are cheap or overpriced. Our analysis can help explain why sophisticated investors in unlisted firms and regulators of listed firms do not rely entirely on preemptive rights to address cheap-stock tunneling, supplementing them with other restrictions on equity issues.

Keywords: Controlling shareholder; Tunneling; Preemptive rights; Rights offer; Equity issuance (search for similar items in EconPapers)
JEL-codes: G34 G38 K22 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:2:p:353-370

DOI: 10.1016/j.jfineco.2020.03.001

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