Effectiveness of pre-commitments on reducing asymmetrical information in equity issues

ABSTRACT

The aim of this article is to find out whether or not consideration of significant shareholders announcement of intention to exercise subscription rights makes a difference in eliminating or reducing the effects of asymmetrical information in equity offerings with pre-emptive rights on the Spanish Stock Market. For the 17 years of equity issues covered, we find that the type of underwriting arrangements has not a statistically significant impact on the issues’ Excess Risk Adjusted Return. The main contribution of this study is the finding of a statistically significant negative impact on returns either when the significant shareholders indicate their intention not to subscribe or when not enough information is provided about their intention. We also find a statistically significant reinforcing negative effect on returns in the case of simultaneous lack of commitment on the part of significant shareholders, and non-underwritten equity issues.

KEYWORDS:

• Equity issues’ returns
• significant shareholders
• information asymmetry
• signalling

JEL CLASSIFICATION:

• D82
• G14
• G32
• G31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Equity issues not considered correspond to three issues made by companies that were already in the process of either bankruptcy or liquidation.