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Abstract
This paper examines the effects of rights issue announcements on share prices. A rights issue is one method through which a company can raise external equity. In essence it comprises an issue to existing shareholders in the company of rights to subscribe for additional new shares.
Previous empirical studies show that share prices tend to react negatively on the announcement of a new equity issue by a company. Various theories have been proposed regarding the cause of this price effect.
The study examines rights issues by companies listed under the Financial and Industrial sectors of The JSE during the period 1986 to 1992. Only rights issues of ordinary shares are included and various other restrictions are imposed to improve the reliability of the study. The event study methodology is used to calculate abnormal price returns over a market index.
The study shows that there is a statistically significant drop in share price in the ten days immediately subsequent to the first announcement of the rights issue. Tests carried out to establish one or more causes for the price effect did not yield any statistically significant conclusions, although some interesting trends were identified visually.