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Price discounts in rights issues: why do managers insist on what investors hate?

Cesario Mateus (Faculty of Business, Accounting and Finance, University of Greenwich, London, UK)
Jorge Farinha (Faculdade de Economia, Universidade do Porto, Porto, Portugal)
Nuno Soares (Faculdade de Economia, Universidade do Porto, Porto, Portugal)

European Business Review

ISSN: 0955-534X

Article publication date: 12 June 2017




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.


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.


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.


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.



This research has been financed by the European Regional Development Fund through COMPETE 2020 – Programa Operacional Competitividade e Internacionalização (POCI) and by Portuguese public funds through FCT (Fundação para a Ciência e a Tecnologia) in the framework of the project POCI-01-0145-FEDER-006890.


Mateus, C., Farinha, J. and Soares, N. (2017), "Price discounts in rights issues: why do managers insist on what investors hate?", European Business Review, Vol. 29 No. 4, pp. 457-475.



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