Information asymmetry and the choice between rights issue and private placement of equity


Bipin Sony & Saumitra Bhaduri


BASE University Working Paper Series 01 /2020


This study examines the role of information asymmetry in the choice between rights issue and private equity placement from an important emerging market- India. In the post IPO scenario, Indian firms issue equity mainly through private placements as well as rights issues and follow-on public offers are negligible. We argue that problems associated with information asymmetry trickles down to all levels of equity issues. The outcome of this empirical exercise shows only those firms facing lesser information problems choose rights issue of equity. Private placements are chosen by firms facing higher information problems to circumvent information costs. The results remain invariant even after segregating the qualified institutional placements from private equity placement as the firms with information disadvantage choose to place equity privately