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• W2218825293 abstract "In this paper we develop a model for the choice of the equity issuing method, where the major determinants of the choice are 1) over- and undervaluation of shares and 2) the price impact from selling shares in the market. In our model there is a price impact, i.e., a temporary decline in price, whenever a company sells its equity to investors. The price impact is necessary to induce the investors to carry the additional risk associated with the equity offering. The price impact is larger for rights issues than for public equity offerings, as in the latter case the investment bank through its marketing efforts attracts new investors to the market, which reduces the price impact. Due to the difference in price impact, in our model, public offerings dominate rights issues unless companies are sufficiently undervalued. Such sufficient undervaluation can occur in our model only for hard to firms, i.e., firms with large value uncertainty. In the empirical part, using a sample of the largest European stocks, we show that there is indeed a price impact and it is larger for rights issues. Secondly, we show that over- and undervaluation and value uncertainty affect the choice of the offering method as predicted by the model. Our theoretical and empirical results are consistent with the observed positive run-up before public offerings, which is followed by poor long-run returns for the issuing firms' stocks. In case of rights offerings, there is no run-up." @default.
• W2218825293 created "2016-06-24" @default.
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• W2218825293 date "2009-01-01" @default.
• W2218825293 modified "2023-09-25" @default.
• W2218825293 title "Value Uncertainty, Price Impact and the Choice of the Equity Issuing Method" @default.
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• W2218825293 doi "https://doi.org/10.2139/ssrn.1083372" @default.
• W2218825293 hasPublicationYear "2009" @default.
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