Working Paper
This paper studies the true nature of rights issues and the governance role blockholders might have. On the one hand, rights issues provide the positive effect of avoiding to issue undervalued stock to outside investors as is the case in cash offers. On the other hand, they can be viewed as “coercive” devices in the absence of a liquid market for selling the rights or, even worse in the case of non-tradability of the rights. While investors can avoid coercion by selling their shares before the ex-rights date, such a strategy will be complicated for large investors, i.e. blockholders.
Using a unique sample of 37,767 equity issuances around the world, the authors document that, in the presence of blockholders firms are less likely to resort to rights offers. Conditional on doing the rights offer, the presence of blockholders is related to higher value creation, suggesting that the money raised through the rights offer is less likely to be wasted in negative NPV projects. Also, the presence of blockholders reduces the willingness of the firm to restrict the tradability of the rights.
Finally, the authors show that blockholders ensure good corporate governance, especially in the absence of legal provisions.
Faculty
Professor of Finance
Emeritus Professor of Finance