Rights Offerings and Corporate Financial Condition

Authors

  • Nancy D. Ursel

    1. Nancy D. Ursel is a Professor of Finance at the University of Windsor in Windsor, Ontario Canada N9B 3P4
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      Research on rights offerings continues in other jurisdictions where rights offerings continue to be prevalent. For example, Armitage (2002) and Slovin, Sushka, and Lai (2000) study the UK; Lukose and Rao (2003), India; Wu and Wang (2002), Hong Kong; Bigelli (1998), Italy; Brrhren, Eckbo, and Michalsen (1997), Norway; Tsangarakis (1996), Greece, and Kang and Stulz (1996), Japan. However, institutional differences in these other jurisdictions mean that the results may not be applicable to the US. Burch, Christie, and Nanda (2004) examine rights usage in the US in the 1930s and 1940s.


  • I am grateful to the Editors and especially to an anonymous referee for many helpful suggestions. The article has also benefited from comments from Ata Assaf, Keith Cheung, Arnold Cowan, Erdal Gunay, Unyong Pyo, Rajeeva Sinha, and the participants at the Midwest and Northern Finance Association Meetings. I am thankful for the assistance of Kim Xuemei Chen, Roger Hussey, and Eric P. Evans and for a grant from the University of Windsor Research Board.

Abstract

Certain American industrial firms still use equity rights offerings. Most of these offerings are uninsured. I examine firms' financing decisions, and develop the explanation that rights offerings are used by firms in financial distress with difficulty accessing underwriting services. These firms have little to lose from the costs of adverse selection that accompany the lack of underwriter certification of uninsured rights offerings. Probit analysis of 660 seasoned NYSE, Amex, and Nasdaq equity issues between 1983–1999 yields results consistent with my explanation. There is no evidence that variables previously linked to rights usage (e.g., ownership concentration) continue to be relevant to the issue method choice.

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