Rights Offerings and Corporate Financial Condition

Abstract

Certain American industrial firms still use equity rights offerings. Most of these offerings are uninsured. I examine firms' financing decisions, and develop the explanation that rights offerings are used by firms in financial distress with difficulty accessing underwriting services. These firms have little to lose from the costs of adverse selection that accompany the lack of underwriter certification of uninsured rights offerings. Probit analysis of 660 seasoned NYSE, Amex, and Nasdaq equity issues between 1983-1999 yields results consistent with my explanation. There is no evidence that variables previously linked to rights usage (e.g., ownership concentration) continue to be relevant to the issue method choice. Copyright (c) 2006 Financial Management Association International.

Rights Offerings, Trading, and Regulation: A Global Perspective

“…In the U.S., only a few companies have made rights offerings in recent decades. This "disappearing rights phenomenon" has been documented by Smith (1977), Hansen (1988), Eckbo andMasulis (1992), Kothare (1997), Armitage (1998), Heron and Lie (2004), and Ursel (2006). In an international study, McLean, Zhang, and Zhao (2008) report a relation between country-wide governance standards and the choice between rights and cash offers.…”

Selection Bias and the Underwriter Certification of the Largest Shareholders in Seasoned Equity Offerings

“…20 After 19 These variables include (i) the standard deviation of the residuals (SE) from a standard marketmodel regression as a proxy for the firm-specific risk (Denis 1991;Balachandran et al 2008;Pandes 2010); (ii) Beta (A_BETA), a proxy for underwriting risk that cannot be reduced by diversification (Ng and Smith 1996); (iii) the market-to-book ratio (Ln(M/B)), a proxy for potential growth prospects (D'Mello et al, 2003;Balachandran et al 2008); (iv) free cash flows-to-total assets ratio (FCF) is the corporate finance variable to examine the potential conflict between the largest shareholder and minority shareholders in a family-controlled firm, as proponed by Jensen (1986); (v) a dummy variable CONS that equals to one if the offer is involved in share consolidations as part of capital reorganizations of an issuing firm and zero otherwise. It serves as a proxy for financing conditions and firm quality (Armitage 2002;Ursel 2006); (vi) Ln(EX_DAY) could measure the complexity level and price risk of an offer; (vii) the dividend yield (DIV), a firm quality proxy (Denis 1994;Wu et al 2005); (viii) return on assets (ROA), a proxy for firm quality; (ix) price discount (DIS), a proxy for firm quality (Heinkel and Schwartz 1986;Slovin et al 2000); (x) both the firm age (Ln(AGE)) and the firm size (Ln(F_SIZE)) are used as the proxies for the level of information asymmetries (Wu et al 2005); (xi) the ratio of gross proceeds to the market value of an issuing firm (R_SIZE) to measure the size of investment opportunities relative to firm size (Slovin et al 2000); and (xii) METHOD, MARKET, and FIN, as defined earlier, are the rest of control variables. 20 This paper does not address the endogeneity problems among all explanatory variables, including FEES and DIS.…”

“…); (iv) free cash flows‐to‐total assets ratio (FCF) is the corporate finance variable to examine the potential conflict between the largest shareholder and minority shareholders in a family‐controlled firm, as proponed by Jensen (); (v) a dummy variable CONS that equals to one if the offer is involved in share consolidations as part of capital reorganizations of an issuing firm and zero otherwise. It serves as a proxy for financing conditions and firm quality (Armitage ; Ursel ); (vi) Ln(EX_DAY) could measure the complexity level and price risk of an offer; (vii) the dividend yield (DIV), a firm quality proxy (Denis ; Wu et al . ); (viii) return on assets (ROA), a proxy for firm quality; (ix) price discount (DIS), a proxy for firm quality (Heinkel and Schwartz ; Slovin et al .…”

Stock Market Liquidity and the Rights Offer Paradox

“…Further, a considerable proportion of U.S. rights issuers are in financial distress. Ursel (2006) reports that at least 28% of sample rights firms have declared bankruptcy within the sample period. Therefore, the fraction of the issue subscribed to by outside investors is limited, resulting in an increase in initial blockholdings.…”

“…We can therefore compare the effects of ex ante liquidity on the choice of a flotation method as well as the consequences of this choice on post SEO liquidity, which has rarely been done in previous work. Second, 5 whereas in the U.S., utilities, closed-end funds, REITS, and more recently financial distressed firms are the primary users of rights offerings (Heron andLie, 2004, andUrsel, 2006), in France large publicly traded corporations frequently choose this flotation method. Furthermore, while there has been a trend away from rights offerings in the 1990s, rights offerings have not disappeared, and large firms still choose this method.…”