Right issue with high dilutive effect: evidence from the Italian Stock Market

This study investigates the effect on stock prices around the ex-dates of rights offerings by firms listed on the Italian Stock Exchange. We focus on the rights offerings that have taken place in the period between January 2009 and April 2011, whereby several of those have been highly dilutive, drawing the attention of the Italian Authority for the Financial Markets. The results demonstrate a significant abnormal stock return of 13.81 percent on the ex-date of an offering for the whole sample, which is mostly driven by highly dilutive operations. In particular, we analyze the phenomenon by running multiple regressions of the cumulative abnormal return on the price-adjustment coefficient K at the ex-right date, the gross amount of funds raised at the offering and the market-to- book value. We find that the K-factor explains most of the anomaly. One of the main misleading peculiarities of high dilutive rights offerings is the high subscription price discount of the new equities issued with respect to the current stock market price. This implies that the ex-date stock price adjustment is so relevant to be similar to a stock splits. As a consequence, the price adjustment is able to puzzle investors about the stock fair price, as suggested also by the Italian Financial market Authority (CONSOB). Our results seem to confirm this hypothesis. Furthermore, we examine the consequences of the highly dilutive rights offers on the option right market as well as on the derivative markets being some of the stocks underlying assets of option contracts.