Seasoned Equity Offers and Rights Issues : A Review of the Evidence

The paper reviews evidence from the USA and UK on seasoned equity offers (SEOs) and rights issues. There are two main avenues of research: first, the market reaction to announcements of SEOs, and the related questions of the price elasticity of demand for new shares and the timing of issues; second, the costs of issuing and choice of issuing method. The negative reaction to announcements is well documented and the evidence suggests it is more due to an issue being a signal of overvaluation than to inelastic demand. Other findings are less well understood. The shares of issuers underperform appreciably in the long term, and there is evidence that market receptiveness to new issues varies. Companies tend to choose the most expensive method of issue both in terms of direct costs and negative market reaction. US companies use non-rights issues, though rights appear to have been cheaper; UK companies use underwritten rights, though non-underwritten rights are slightly cheaper. A possible explanation is that certification of issuer value by the sponsor is more credible with non-rights issues in the USA and underwritten rights in the UK than with the apparently cheaper alternatives