Rights Offerings in a Different Institutional Setting : Evidence from the Istanbul Stock Exchange

The Istanbul Stock Exchange (ISE) is an emerging capital market with its unique institutional settings. This research investigates the market reaction to both 'unsweetened' and 'sweetened' rights offerings (with simultaneous distribution of bonus shares) during the announcement and subscription periods, and tests three hypotheses – the signaling, the issue price irrelevance and the improved liquidity (enhanced investor base) hypotheses. During the announcement period, a negative market reaction is empirically detected for 'unsweetened' rights offerings similar to the research results in developed capital markets. However, for 'sweetened' rights offerings, a positive market reaction is detected supporting the sweetener effect of bonus issues. During the subscription period, for both 'unsweetened' and 'sweetened' rights offerings, positive market reactions are detected. The cross-sectional analyses of the observed market reactions provide evidence supporting only the signaling and the improved liquidity hypotheses within the ISE's institutional settings. The empirical evidence is consistent with the view that the Turkish corporations decide to issue equity on different considerations than the corporations operating in developed markets