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A Rent-Protection Explanation for SEO Flotation-Method Choice

Published online by Cambridge University Press:  13 July 2016

Xueping Wu ,
Zheng Wang  and
Jun Yao
Xueping Wu*
Affiliation:
[email protected], City University of Hong Kong, Department of Economics and Finance, Kowloon, Hong Kong
Zheng Wang
Affiliation:
[email protected], Sinolink Securities Co. Limited, Beijing100033, PR China
Jun Yao
Affiliation:
[email protected], Hong Kong Polytechnic University, School of Accounting and Finance, Hung Hom, Kowloon, Hong Kong.
*
*Corresponding author: [email protected]
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Abstract

We model how a rent-protection motive drives the choice of flotation method in new equity issuance between two polar cases: rights issues and cash offers. Unexpected new blockholders would emerge in control-diluting cash offers and share in jealously guarded control benefits. But rights issues help the incumbent controlling shareholders avoid control dilution and safeguard their private benefits. Under asymmetric information about private benefits, the choice of flotation method can convey information about hidden private benefits and hence firm value. Our model can explain even a negative announcement effect of rights issues, and it supports not just one but three important equilibriums.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 3 , June 2016 , pp. 1039 - 1069
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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