The Efficiency of rights on the JSE

Abstract

As a result of Johannesburg Stock Exchange regulations, the majority of equity issues are by rights issue. The objective of this study is to establish whether the South African market for rights issues is efficient. Using the Black-Scholes model, theoretical rights pricing boundaries were tested, and actual rights prices compared to model prices. Dilution adjusted and unadjusted model prices were calculated using historical standard deviation and implied standard deviation measures of volatility. Results showed inefficiencies associated with the lower boundary condition. The results for daily and per issue pricing indicate significant overpricing. Additional findings are that the dilution adjustment is required and the implied standard deviation is a better measure of volatility than the historical standard deviation.

Key Words:

• market efficiency
• rights issues
• NPLs
• JSE