The Choice of Seasoned Equity Flotation Method under Asymmetric Information about Private Benefits of Control

摘要

New issues to outside investors and rights offers are two major flotation methods used in seasoned equity offerings (SEOs) worldwide. Yet the existing literature has been unable to explain at the same time: (a) why some firms choose rights offers and other firms choose new issues within a particular country; (b) why almost all firms in the U.S. are willing to choose new issues rather than rights offers; and (c) why almost all firms in most European and Pacific Basin countries do the opposite-choose rights offers rather than new issues. This paper suggests that controlling shareholders’ concern about an intrusioninduced, significant loss of their private benefits of control crucially affects the choice of flotation method. We argue that control-diluting new issues provide a window opportunity for rent-seeking new blockholders to emerge to share in the incumbents’ control benefits; when coming to raise new equity, if the incumbents have large control benefits, they may have to resort to rights offers to safeguard them. Under asymmetric information about control benefits, the choice of flotation method can convey new information about firm value. Our theory supports three important equilibriums that characterize the choice of flotation method worldwide and help explain various SEO announcement effects especially when rights offers are involved.