Topic: Controlling Ownership, Adverse Selection, and Choice in Equity Offering Method
Presenter：Lewis Tam， Assistant Professor， Department of Finance and Business Economics， University of Macau
Time: November 2, 2007（Friday）3：00—4：30 PM
Venue: Room 513, Jiageng Bld 2
Chiar： Yujun Wu, assistant professor in finance, IFAS
Abstract：
We model the choice between a rights offering and a public offering of shares in the presence of a controlling shareholder—a common feature in emerging markets. A key feature of the model is that the controlling shareholder pre-commits not to subscribe to new shares in a rights offering, as opposed to the common practice in most countries. Assuming high ownership concentration is costly, we argue that a rights offering of this kind provides the controlling shareholder greater incentives to reduce ownership, by allowing the capture of all or most of the benefits that come from reducing ownership concentration. The dark side of this feature is that the controlling shareholder will offer shares only upon receiving a bad signal on firm value—an adverse selection problem similar to but less severe than the one in a public offering. While a rights offering often reveals a less adverse signal than a public offering, the difference converges when the controlling ownership is increasing. We test the model implications with a dataset of equity offerings in China where the state and its related parties always pre-commit not to subscribe to new shares in rights offerings. The results are largely consistent with our model implications. Our study sheds light on the choice of method to reduce government ownership in emerging markets by comparing the costs and benefits of alternative selling mechanisms.
Presenter Introduction：
Dr. Lewis Tam got his BBA and PhD degree in finance in HKUST. His research and teaching interests include Corporate Finance, Capital Budgeting, Capital Structure, Mergers & Acquisitions and Valuation.
Download: paper