When Rights Can’t Be Traded: Virtue or Vice in Governance?

The authors examine whether restricting the tradability of rights in seasoned equity offerings (SEOs) reflects good or bad corporate governance. While rights offerings remain a central mechanism for raising equity worldwide, firms in many countries can choose between issuing tradable or non-tradable rights, a decision with potentially important governance implications. Existing evidence on this choice is limited and largely focused on execution risk. They develop and test three competing hypotheses. Under the Coercion hypothesis, managers restrict tradability to pressure dispersed shareholders into subscribing. Under the Protection hypothesis, non-tradability shields passive investors from value transfers in illiquid or undervalued rights markets. Under the Private benefits of control hypothesis, blockholders exploit non-tradability to consolidate control. Using a global sample of 8,059 rights issues across 55 countries, they combine short- and long-term event-study analyses with Heckman selection models and maximum likelihood estimation to address endogeneity. They find that firms are more likely to restrict tradability when expected rights-market liquidity is low, consistent with execution or protection considerations influencing the choice of rights tradability. Announcement-period market reactions to non-tradable rights are ambiguous on average and conditional on governance. In contrast, non-tradable rights are associated with negative long-run abnormal returns unless blockholders are present. These findings suggest that while non-tradability may be motivated by benign considerations, its ultimate impact on shareholder value depends on ownership structure and monitoring. By exploiting international variation in tradability regimes, their study provides new evidence on how governance and market conditions jointly shape the choice and consequences of rights issue design.