Equity Issuance Methods and Dilution

Equity Issuance Methods and Dilution

Mike Burkart, Hongda Zhong

Series number :

Serial Number: 
636/2019

Date posted :

November 19 2019

Last revised :

November 19 2019
SSRN Share

Keywords

  • Rights offerings • 
  • Public offerings • 
  • asymmetric information • 
  • Winner Curse • 
  • Wealth Transfer

We analyze rights offerings and public offerings in a setting where better informed current shareholders strategically choose to subscribe.

When all current shareholders have wealth to participate, rights offerings achieve the full information outcome and dominate public offerings. When some current shareholders are wealth constrained, rights offerings lead to more dilution of their stakes and lower payoffs, despite the extra income from selling these rights. When firms can choose the floatation method, either all firms choose the same offer method or high and low quality firms opt for rights offerings while firms of intermediate quality select public offerings.

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Published in

Published in: 

Authors

Professor
Real name:
Mike Burkart
Fellow, Research Member
London School of Economics and Political Science
Real name:
Hongda Zhong