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Price discounts in rights issues: why do managers insist on what investors hate?

Price discounts in rights issues: why do managers insist on what investors hate?

Mateus, Cesario, Farinha, Jorge and Soares, Nuno (2017) Price discounts in rights issues: why do managers insist on what investors hate? European Business Review, 29 (4). pp. 457-475. ISSN 0955-534X (doi:https://doi.org/10.1108/EBR-02-2016-0036)

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Abstract

We analyse the causes and impact of the significant mean price discounts (25% for financial and 29% for non-financial firms) in rights issues in the UK using a sample of 268 observations for the period of 1994 to 2012. We observe that for non-financial companies the issue terms announcement returns are negatively affected by the discount size, while firm size, growth prospects and good previous stock performance have a positive impact. We also investigate which factors seem to influence managers to engage in deeper discounts when these are so disliked by investors. Evidence is provided that firms with more leverage, larger bid-ask spreads or suffering losses tend to choose deeper discounts. We conclude that managers balance the expected negative reaction of the market to a price discount with the risks of a costly issue failure, with these being higher when the firm experiences losses, has a higher volatility and also when the stock market climate is more adverse.

Item Type: Article
Uncontrolled Keywords: Rights issues; Market efficiency; Equity financing;
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Last Modified: 13 Jun 2019 01:38
Selected for GREAT 2016: None
Selected for GREAT 2017: GREAT b
Selected for GREAT 2018: None
Selected for GREAT 2019: None
URI: http://gala.gre.ac.uk/id/eprint/16095

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