The pricing and impact of rights issues of equity in Australia
Sian Owen and
Applied Financial Economics, 2008, vol. 18, issue 14, 1147-1160
We investigate abnormal returns resulting from the announcement of a rights issue in Australia and are the first study outside the United States and the United Kingdom to examine the pricing of rights issues and the determinants of that pricing. Rights issues generate a significantly negative abnormal return and, on average, are priced at a discount. The determinants of the announcement effect are analysed using a two-stage approach controlling for the endogeneity of the price discount. We first estimate the predicted discount and then include it as an independent variable in the announcement effect regression. The discount is positively related to the offer size and negatively related to underwriter quality, supporting underwriter certification models. We also include variables that have not been tested in any market, such as shareholder concentration which is negatively related to the discount implying that firms with higher shareholder concentration do not offer a significant discount as their shareholders wish to maintain their percentage holding in the firm. Further, the abnormal returns have a negative relationship with the predicted price discount, and a positive relationship with the use of proceeds. Finally, announcements made by resource firms generate larger negative reactions than other issuers.
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