Dangers in Data Adjustment: The Case of Rights Issues and Returns
In this paper we alert researchers to the potential for unrecognised errors inusing adjusted price and daily return data. This problem is illustrated byconsidering the case of ex-rights price adjustments. We present fivealternative adjustment procedures that would be expected to generatesimilar results. We show, however, that these procedures result insignificantly different dilution factors and returns. Our investigationssuggest that the problem is associated with the theoretical valuation of therights. In a substantial proportion of cases, the standard textbook model isinappropriate because of the non-standard nature of the rights issue.Correcting for these non-standard cases is a non-trivial task since theyconstitute more than half of the issues. The extent of this problem does notappear to be well recognised. Deletion of non-standard rights issueseliminates extreme values in dilution factors, but statistically significantdifferences remain. Our moral is simple; uncritical acceptance of data 'as is'from computer data files may lead researchers to erroneous conclusions. Italso seems noteworthy that the standard textbook model of rights pricingonly applied to a minority of Australian rights issues over recent years. Thisresult has implications for the calculation of EPS under AASB 1027.As a byproduct,our analysis suggests that the ex-rights daily return is close to zero.Adjustment factors; Dilution factors; Returns; Rights issues
Year of publication: |
2006
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Authors: | Partington, G. ; Chu, H. T |
Publisher: |
Blackwell Publishing |
Saved in:
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