Heterogeneous Investors and the Equity Issue Decision

On the stock market, the investors are not identical. The large investors like the institutional investors, have a significant financial effect and a different valuation of the firm from that of the small investors. When they purchase shares, these two groups are in competition. However, large investors can create an influence premium on corporate value when their ownership reaches a significant percentage. Like Mello and Parsons (1998), we consider that this premium is related to an efficient allocation of the shares between the different investors and it is not always possible to get this on the secondary market. Equity issue provides a large number of new shares. It should be a good opportunity to allow the large investors to acquire a substantial ownership. However, major European markets are characterized by two offerings. The manager can choose between a rights or a direct offering. This model is based on the French equity issues and we use a framework suggested by the managers of issuing firms and leading banks. When the issue size is sufficient, we show that the direct issue facilitates the influence premium of the large investors. In a direct offering, the price effect dominates the volume effect and the weak aggregate demand of the small investors improves the probability of an influence premium. The results are very different for a small issue that does not respect the ownership needed by the large investors. If the manager wants the influence premium, he should choose a rights offering, because the lack of new shares leads the stock market