The long run impact of rights issues on share price performance and operating performance

Abstract

Rights issues continue to be a well-researched topic within the field of corporate finance. The focus of this study was to consider the long-run impact of rights issue on company performance both in terms of share price performance and operating performance. The long-run perspective taken in this study adds to the literature, which usually looks at the immediate share price reaction to a rights issue announcement. The study also looked at whether the intended use of capital stated in the SENS announcement had any post-issue effect on the share price. The study found significantly negative cumulative average abnormal returns within the first year after the rights issue. This study confirms the expected negative share price reaction to a rights issue announcement. The study also found evidence that companies that use the proceeds to repay debt, invest or for general purposes had a negative share price reaction to a rights issue announcement. Companies that were vague about the intended purpose of the rights issue had the largest post-issue underperformance. The study did not find any statistically significant evidence that the rights issue announcement had any effect on the operating performance. These findings suggest that rights issues have more impact on a company’s share price, and no clear impact on the operating performance of the issuing company.