Discount Rates, Subscription Prices, and Subscription Rates in Equity Rights Offerings

Abstract

This study analyzes the wealth effect of discount rates, subscription price announcement effects, and subscription rates with 407 equity rights offerings (with unsubscribed shares to the public) announced between 2004 and 2016. The major results of this study are as follows. First, the market not only responds negatively to the right offering announcements (3-day CAR of -13.83%) but also to announcements of final subscription prices (3-day CAR of -4.85%). The announcement effects of final subscription prices are not related to changes in subscription prices, but become more negative as announcements are delayed. Second, the discount rate significantly affects the wealth effects. This means that discount rates provide the information on firms’ future prospects. Firms with low information asymmetry and high ownership by the largest shareholders choose lower discount rates. Third, the non-subscription rate is about 14% and wealth transfer due to non-subscription is 7.08% of the amount raised by the right offerings. As the offering process is delayed, the subscription rates decrease. In addition, the listing of subscription rights have a significant positive impact on subscription rates. However, as market value decrease due to a right offering is similar to the amount raised, firms should consider alternative financing methods.