Working Paper: CEPR ID: DP14130
Authors: Mike Burkart; Hongda Zhong
Abstract: We analyze rights offerings and public offerings when informed current shareholders strategically choose to subscribe. If all current shareholders have wealth to participate, rights offerings achieve the full information outcome and dominate public offerings. However, when some current shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the income from selling these rights, thereby generating wealth transfers among shareholders. When firms can choose the flotation method, either all firms choose the same offer method or high and low quality firms opt for rights offerings while firms of intermediate quality select public offerings.
Keywords: equity offerings; rights offerings; public offerings; wealth transfer; information asymmetry
JEL Codes: G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rights offerings (G32) | prevent wealth transfers among shareholders (G34) |
| Cash-rich shareholders (G35) | maintain fractional ownership (G32) |
| Cash-poor shareholders (G32) | lower payoffs (G19) |
| Rights offerings (G32) | greater dilution of stakes for cash-poor shareholders (G34) |
| Dilution (D30) | wealth transfer from cash-poor to cash-rich shareholders (G35) |
| Flotation methods (C90) | choice by firms (L21) |
| Strike price in rights offerings (G13) | influence extent of dilution (C20) |
| Rights offerings (G32) | dominate public offerings when all shareholders participate (G34) |