Shareholder wealth effects of rights issues: evidence from the New Zealand capital market

Abstract

This study examines security price reaction to the announcement of rights issues by New Zealand firms between 1976 - l 994. Over this period price reaction to rights issue announcements in New Zealand was significantly negative the price reaction to the announcement was more negative for underwritten compared to non-underwritten rights issues the evidence suggests non-underwritten rights issues have higher expected participation in the issue by existing shareholders. The results are broadly consistent with the adverse selection cost arguments of Eckbo and Masulis (1992) and help further explain the rights offer paradox whereby fi rms in a small capital market like New Zealand continue to rely on rights issues to raise new equity. Price reaction to the rights issue’s announcement was also more negative the larger the relative issue size This evidence supports the hipothesis of Miller and Rock (1935) that large unanticipated external financing convey negative information about internal cash flow from operations.