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Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?
Author(s) -
Armitage Seth,
Dionysiou Dionysia,
Gonzalez Angelica
Publication year - 2014
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12074
Subject(s) - equity (law) , shareholder , issuer , financial distress , stock (firearms) , business , private placement , financial economics , economics , private equity , short interest ratio , finance , microeconomics , monetary economics , financial system , corporate governance , investment banking , law , mechanical engineering , political science , engineering , paleontology , context (archaeology) , biology
This paper investigates the large and diverse discounts in UK open offers and placings. Large discounts are a substantial cost to shareholders who do not buy new shares. The existing literature mainly examines US firm‐commitment offers and private placements. The institutional setting differs in the UK, in ways that make the theory of inelastic demand for shares more important as an explanation for discounts than in the US. The paper finds that inelastic demand, or illiquidity of the issuer's shares, and financial distress, are key determinants of the discount. We expect these results to apply to other stock markets.