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Rights issues for companies with dual-class shares

Author: Hietala, Pekka ; Löyttyniemi, TimoINSEAD Area: FinanceIn: Journal of Multinational Financial Management, vol. 3, no. 3/4, 1993 Language: EnglishDescription: p. 103-124.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: This essay examines the pricing of rights issues for companies wich have both superior and limited voting power shares. it focuses on the setting of the subscription prices at both the theoretical and the empirical level. The main result of the essay is that subscription prices for superior and limited voting power shares should be set in relation to their market prices, to avoid any wealth transfers between different shareholder groups. Deviations from this neutral pricing should be seen in relative returns between these share series after share issue announcement. Using data from Finland, we found that subscription prices were set relative to the market prices in 1975-1988. The deviations from this were so small that we could not detect any cross-sectional effects of share issue announcements that could be explained by the model. It is evident that companies price rights issues so that any relative valuation effects are avoided
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This essay examines the pricing of rights issues for companies wich have both superior and limited voting power shares. it focuses on the setting of the subscription prices at both the theoretical and the empirical level. The main result of the essay is that subscription prices for superior and limited voting power shares should be set in relation to their market prices, to avoid any wealth transfers between different shareholder groups. Deviations from this neutral pricing should be seen in relative returns between these share series after share issue announcement. Using data from Finland, we found that subscription prices were set relative to the market prices in 1975-1988. The deviations from this were so small that we could not detect any cross-sectional effects of share issue announcements that could be explained by the model. It is evident that companies price rights issues so that any relative valuation effects are avoided

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