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The Demise of the Rights Issue

Robert S. Hansen
The Review of Financial Studies
Vol. 1, No. 3 (Autumn, 1988), pp. 289-309
Stable URL: http://www.jstor.org/stable/2962000
Page Count: 21
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The Demise of the Rights Issue
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Abstract

This article suggests that the lack of use of rights offerings in the United States, a phenomenon referred to as the equity underwriting paradox, can be explained by transaction-cost conditions. A sample of underwritten rights offerings provides support for the explanation. Firms making underwritten rights offerings paid lower underwriter fees but incurred significantly larger price drops just prior to the offering than did firms making underwritten public offerings. Further analysis reveals that the underwritten-rights-offering price concessions are a form of transaction cost that is not found in underwritten public offerings.

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