Journal of Financial Economics Vol. 32 No. 3 1992
Adverse selection and the rights offer paradox
Abstract
We develop an analytical framework to explain firm's choice of equity flotation method and the near disappearance of rights offers by U.S. exchange-listed firms. The choice between uninsured rights, rights with standby underwriting, and firm-commitment underwriting depends on information asymmetries, shareholder characteristics, and direct flotation costs. Underwriter certification and current-shareholder takeup are viewed as substitute mechanisms for minimizing wealth transfers between shareholders and outside investors. Uninsured rights create adverse-selection effects when shareholder takeup is low. Implications for stock-price behavior around issue announcements, shareholder subscription precommitments, and relative issue frequencies are supported by large-sample evidence.
- DOI
- 10.1016/0304-405x(92)90030-2
- Volume
- 32
- Issue
- 3
- Pages
- 293-332
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref