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Seasoned equity offers and rights issues: a review of the evidence

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  • Seth Armitage

Abstract

The paper reviews evidence from the USA and UK on seasoned equity offers (SEOs) and rights issues. There are two main avenues of research: first, the market reaction to announcements of SEOs, and the related questions of the price elasticity of demand for new shares and the timing of issues; second, the costs of issuing and choice of issuing method. The negative reaction to announcements is well documented and the evidence suggests it is more due to an issue being a signal of overvaluation than to inelastic demand. Other findings are less well understood. The shares of issuers underperform appreciably in the long term, and there is evidence that market receptiveness to new issues varies. Companies tend to choose the most expensive method of issue both in terms of direct costs and negative market reaction. US companies use underwritten non-rights, through underwriting increases the direct costs. A possible explanation is that certification of issue value by the sponsor is more credible with non-rights issues in the USA and underwritten rights in the UK than with the apparently cheaper alternatives.

Suggested Citation

  • Seth Armitage, 1998. "Seasoned equity offers and rights issues: a review of the evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 4(1), pages 29-59.
    • Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:29-59
    DOI: 10.1080/13518479800000002
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    References listed on IDEAS

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    1. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers 39, Bank of England.
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    Cited by:

    1. Massa, Massimo & Mataigne, Virginie & Vermaelen, Theo & Xu, Moqi, 2017. "Choices in Equity Finance A Global Perspective," CEPR Discussion Papers 11987, C.E.P.R. Discussion Papers.
    2. Massa, Massimo & Vermaelen, Theo & Xu, Moqi, 2013. "Rights offerings, trading, and regulation: a global perspective," LSE Research Online Documents on Economics 55403, London School of Economics and Political Science, LSE Library.
    3. B. M. Burton & D. M. Power, 2003. "Evidence on the determinants of equity issue method in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 145-157.
    4. Proches Ngatuni & John Capstaff & Andrew Marshall, 2007. "Long‐Term Performance Following Rights Issues and Open Offers in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 33-64, January.
    5. Chiarella, Carlo & Cubillas, Elena & Suárez, Nuria, 2019. "Bank recapitalization in Europe: Informational content in the issuing method," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    6. Consuelo Riano & Fco. Javier Ruiz & Rafael Santamaria, 2007. "Determinants of the underpricing of new shares during the subscription period: empirical evidence from the Spanish stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 17(7), pages 521-540.
    7. Kabir, Rezaul & Roosenboom, Peter, 2003. "Can the stock market anticipate future operating performance? Evidence from equity rights issues," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 93-113, January.
    8. Andrikopoulos, Panagiotis, 2009. "Seasoned equity offerings, operating performance and overconfidence: Evidence from the UK," Journal of Economics and Business, Elsevier, vol. 61(3), pages 189-215.
    9. Seth Armitage & Dionysia Dionysiou & Angelica Gonzalez, 2014. "Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(5-6), pages 743-772, June.
    10. Botta, Marco, 2019. "First-move advantage in seasoned equity offerings: Evidence from European banks," Global Finance Journal, Elsevier, vol. 41(C), pages 1-12.
    11. Juan F. Martín‐Ugedo, 2003. "Equity Rights Issues in Spain: Flotation Costs and Wealth Effects," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9‐10), pages 1277-1304, December.

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