Choice between rights issue and private placements of equity and the role of information asymmetry

Authors: Bipin Sony, Saumitra Bhaduri

Journal: Managerial Finance, Vol. 48 No.3, pages.409-428

Abstract: The objective of this paper is to investigate the role of information asymmetry in the equity selling mechanisms chosen by firms from an important emerging market, India. Specifically, the authors look into the choice between the two popular mechanisms of equity issues in India – rights issues and private placement of equity. First, the paper tests the choice between rights issues and private placements. In the second approach, the authors use rights issues and segregate the private placements into preferential allotments and qualified institutional placements and test the impact of information asymmetry. The outcome of this empirical exercise shows that only those firms facing lesser information problems choose the rights issue of equity. Private placements are chosen by firms facing higher information problems, thereby circumventing information costs.