Suchergebnisse

There was much of pointing fingers in the wake of the 2008 Global Financial Crisis. Economists, politicians and the financial industry itself dwelled to assign blame to what is considered to be the most damaging economic crisis since the 1930s Great Depression. Undoubtedly, the over-counter- derivatives market has been target for criticism on different fronts and cast into the limelight. Ruthless press articles condemning OTC instruments only helped to fuel the rage and social discontent of the thousands of unemployed that emerged after the crash, while regulators and policy makers seized the opportunity to publicly express their disapproval by sentencing the alleged opaqueness and complexity of derivative products, while they themselves were the ones who pushed for de-regulation and less stringent market oversight of what were back then considered "innovative products and good for society".

Purpose
This paper aims to analyse the causes and impact of the significant mean price discounts (25 per cent for financial and 29 per cent for non-financial firms) in rights issues in the UK using a sample of 268 observations for the period of 1994 to 2012. It is observed that for non-financial companies, the issue terms announcement returns are negatively affected by the discount size, while firm size, growth prospects and good previous stock performance have a positive impact. It is also investigated which factors seem to influence managers to engage in deeper discounts when these are so disliked by investors. Evidence is provided that firms with more leverage, larger bid-ask spreads or suffering losses tend to choose deeper discounts. The authors conclude that managers balance the expected negative reaction of the market to a price discount with the risks of a costly issue failure, with these being higher when the firm experiences losses, has a higher volatility and also when the stock market climate is more adverse.


Design/methodology/approach
The analysis is divided in two stages. In a first step (thereafter pre-announcement), the authors evaluate the firm's and market conditions that determine the price discount. In a second stage (post-announcement), the authors measure the market reaction to the rights issues announcement by calculating the abnormal announcement returns by cumulating the difference between daily returns (R) and expected market returns (ER) for the period of −2 to 2 relative to the announcement day.


Findings
The authors document that price discounts in right issues for non-financial and financial firms are determined by a set of firm-characteristics and market sentiment. They also bring evidence that price discounts are not arbitrarily determined by firm managers.


Originality/value
The results are consistent with the idea that despite the negative signal to investors conveyed by a significant price discount in the new shares, managers of non-financial companies still engage in substantially price-cutting.