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An Implicit dividend increase in rights issues: theory and evidence

Author: Hietala, Pekka ; Löyttyniemi, TimoINSEAD Area: Finance Series: Working Paper ; 91/03/FIN Publisher: Fontainebleau : INSEAD, 1991.Language: EnglishDescription: 36 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: The paper analyses the implicit dividend increase associated with rights issues. If a company issues new equity for existing shareholders for less than the market price, and keeps the dividend per share constant, the share issue has a dividend increase implication. This implied dividend increase is a signal for the market like any other dividend announcement. The hypothesis has been tested with the Finnish data from 1975-88. Empirical evidence from cross-sectional data gives strong support for the proposed hypothesis. The announcement reaction to rights issues and to combined issues of a rights issue and a stock dividend is positively correlated with the size of the implicit dividend increase measured with an adjustment (a split) factor
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The paper analyses the implicit dividend increase associated with rights issues. If a company issues new equity for existing shareholders for less than the market price, and keeps the dividend per share constant, the share issue has a dividend increase implication. This implied dividend increase is a signal for the market like any other dividend announcement. The hypothesis has been tested with the Finnish data from 1975-88. Empirical evidence from cross-sectional data gives strong support for the proposed hypothesis. The announcement reaction to rights issues and to combined issues of a rights issue and a stock dividend is positively correlated with the size of the implicit dividend increase measured with an adjustment (a split) factor

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