Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?

Authors

  • Seth Armitage,

    Corresponding author
    • Address for correspondence: Seth Armitage, University of Edinburgh Business School, 29 Buccleuch Place, Edinburgh, UK.

      e-mail: seth.armitage@ed.ac.uk

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  • Dionysia Dionysiou,

  • Angelica Gonzalez

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    • The first and third authors are from the University of Edinburgh Business School, 29 Buccleuch Place, Edinburgh, UK. The second author is from the University of Stirling Management School, Stirling, UK. The authors are grateful to the referee for detailed comments, to the Editor, Martin Walker, for his comments, and to seminar participants at the Universities of Edinburgh and Stirling, Heriot-Watt University, the Multinational Finance Association Conference 2013, and the British Accounting and Finance Association Conference 2012. (Paper received April 2013; revised version accepted February 2014).


Abstract

This paper investigates the large and diverse discounts in UK open offers and placings. Large discounts are a substantial cost to shareholders who do not buy new shares. The existing literature mainly examines US firm-commitment offers and private placements. The institutional setting differs in the UK, in ways that make the theory of inelastic demand for shares more important as an explanation for discounts than in the US. The paper finds that inelastic demand, or illiquidity of the issuer's shares, and financial distress, are key determinants of the discount. We expect these results to apply to other stock markets.

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