| Summary: | Investors react adversely to the announcements of rights offers in Hong
Kong and the abnormal return of rights offers on the announcement day
is −12.10%. After taking price discounts, underwriting fees and
abnormal returns into consideration, the total direct and indirect costs
of the seasoned issuers of rights offers are tremendously high. The
cross-sectional analysis shows that investors react more adversely to
the issuers of rights offers with lower growth prospects, higher free cash
flows, larger issue scales, lower pre-issuance stock run up and higher
debt capacity. Our empirical result also indicates that cash-rich firms
with fewinvestment opportunities and firmswith poor quality in terms
of lower market-to-book ratio and larger price discounts choose rights
offers over private equity placements. All this evidence supports that
agency costs and private benefits of control matter in equity financing.
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