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A rent-protection explanation for SEO flotation-method choice

journal contribution
posted on 2016-06-01, 00:00 authored by X Wu, Z Wang, Jun YaoJun Yao
Copyright © Michael G. Foster School of Business, University of Washington 2016. We model how a rent-protection motive drives the choice of flotation method in new equity issuance between two polar cases: rights issues and cash offers. Unexpected new blockholders would emerge in control-diluting cash offers and share in jealously guarded control benefits. But rights issues help the incumbent controlling shareholders avoid control dilution and safeguard their private benefits. Under asymmetric information about private benefits, the choice of flotation method can convey information about hidden private benefits and hence firm value. Our model can explain even a negative announcement effect of rights issues, and it supports not just one but three important equilibriums.

History

Journal

Journal of financial and quantitative analysis

Volume

51

Issue

3

Pagination

1039 - 1069

Publisher

Cambridge University Press

Location

Cambridge, Eng.

ISSN

0022-1090

eISSN

1756-6916

Language

eng

Publication classification

C Journal article; C1.1 Refereed article in a scholarly journal

Copyright notice

2016, Michael G. Foster School of Business, University of Washington