Handbook of Empirical Corporate Finance SET

4 The flotation method choice

In this section, we examine the firm’s choice of issue method. We start with the so-called rights offer paradox first observed by Smith (1977). The paradox highlights the fact that a focus on direct issue costs alone fails to adequately explain the near disappearance of the rights offer method for large, publicly traded corporations in the U.S. We then examine how observed flotation method choices may minimize issue costs under asymmetric information and survey the empirical evidence on announcement effects of security offerings as a function of the flotation method.

4.1 The paradoxical decline in the use of rights

With symmetric information between corporate insiders and outside investors, standard economic theory ...