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On Shareholders' Indifference to the Proceeds Price in Preemptive Rights Offerings

Published online by Cambridge University Press:  19 October 2009

Gary I. Wakoff
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Extract

It has been discovered in the context of various stock valuation models (see [1], [2] and [4]) that the shareholder is indifferent to the proceeds (or subscription) price chosen in a preemptive rights offering of equity capital, provided that the total equity capital raised by the offering is fixed. In this note we generalize this result to any stock valuation model in which arbitrage is present and which values only the total amount of the new investment, that is, places no value on holding more (or fewer) shares with a lower (or higher) market price.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 5 , December 1973 , pp. 835 - 836
Copyright
Copyright © School of Business Administration, University of Washington 1973

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References

[1]Beranek, W.Analysis for Financial Decisions. Homewood, Ill.: Richard D. Irwin, Inc., 1963, pp. 209–216.Google Scholar
[2]Davis, B. E., and Sparrow, F. T.. “Valuation Models in Regulation.” Bell Journal of Economics and Management Science, vol. 3 (Autumn 1972), pp. 544–567.Google Scholar
[3]Evans, G. H. Jr. “The Theoretical Value of a Right.” Journal of Finance, vol. 10 (March 1955), pp. 55–61.CrossRefGoogle Scholar
[4]Mampe, E. P., and Wakoff, G. I.. “A Model of Equity Finance for Regulated Utilities.“ A. T. & T. Memorandum, November 1971.Google Scholar