Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 0452: The choice between rights offerings and private equity placements

Henrik Cronqvist () and Mattias Nilsson ()
Additional contact information
Henrik Cronqvist: The Ohio State University, Postal: Fisher College of Business , Department of Finance , 840 Fisher Hall, 2100 Neil Avenue, Columbus, OH 43210-1144 , USA
Mattias Nilsson: Stockholm Institute for Financial Research (SIFR), Postal: Saltmätargatan 19A, SE-113 59 Stockholm, Sweden

Abstract: We develop and test a nested logit model to examine how firms choose between a rights offering and a private equity placement. We find that family-controlled firms avoid issue methods that dilute control benefits or subject them to more monitoring, in particular when the family’s control margin is small and the wedge between votes and capital is large. Control considerations also affect security design in equity issues. We also find that firms use private placements to reduce contracting and ex post holdup costs in new product market relationships. Finally, we find that firms with higher asymmetric information about firm value are more likely to involve underwriter certification in a rights offering, and to choose a private placement when information asymmetries are extreme.

Keywords: Seasoned equity offerings; Rights offerings; Private equity placements; Equity issue methods

JEL-codes: G32; G34

43 pages, First version: June 8, 2001. Revised: November 1, 2004. Earlier revisions: January 21, 2002, January 21, 2002, March 18, 2003, March 18, 2003.

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