Rights issues versus private placements: theory and UK evidence

UK companies and their shareholders have increasingly opted to have newly issued shares privately placed rather than selling them via a rights issue. We present a model of a choice between these two methods. We see rights issue as similar to the type of issue envisaged by Myers and Majluf (1984), in which information assymetry exists until after the shares are sold. In contrast, the placement process is assumed to enable potential placees to investigate the value of the issuer, and to reveal the true value via the placement price as in Hertzel and Smith (1993). The model yields several testable predictions which are strongly supported by the evidence from a large sample of seasoned equity offers.