Empirical investigation of the efficiency of the U.S. rights offering market

Abstract

One of the frequently employed methods for marketing new equity securities is rights offering. In the U.S., the majority of firms avoid rights offerings Issuing common stock. As there are only a few rights offerings each year and the number of rights offerings even decreases over time, this may create a problem of thin trading. Thus, efficiency of the pricing mechanism of rights and underlying stocks in the U.S. rights offering markets is in question. A number of previous studies investigated the efficiency of the U.S. and U.E. rights offering markets by examining stock price reaction to rights issues (Nelson (1965), Smith (1977), and Harsh (1979)). These studies find that there is only a very slight decline in share price at the time of the rights issue, Consistent with market efficiency.