Equity Rights Issue and Dilutive Effect: Evidence from Italian Listed Companies

Abstract

This article studies the stock price reaction to Seasoned Equity Offerings (SEOs) through the right issue technique, for Italian listed companies in the period between 2007 and 2016. A few days before the starting date of the capital increase operation, investors are provided with a complete information set of the final characteristics of the equity offerings. The study investigates whether this further information is price sensitive. An event study analysis is performed around two price sensitive dates: the “announcement date” of the equity issue and the “communication date” of its final characteristics. It also focuses on the reasons underlying the offer and on the industry effect. The findings show a significant negative abnormal return at the communication date for the full sample and for companies collecting financial resources for “Corporate Finance Transaction”, for "Capital Adequacy" and for “Restructuring”. A negative market reaction for all sectors is observed as well. Eventually, the article examines the possible causes underlying the negative stock price reaction at the communication date. The results suggest that the dilutive effect is the main explanation to the stock price overreaction.

Market reaction to the rights issue announcement on the Indonesia stock exchange

“…There are three techniques for a company to increase equity that are: private placement, public offer, dan rights issue (Martino & Busatto, 2018;Pratama & Rahyuda, 2019). The rights issue is a more profitable choice for a company to gain additional equity compared to bank loans and the issuance of debt securities (Sihaloho & Handayani, 2018;Putra & Sedana, 2019).…”