Are Share Price Reactions To Rights Offerings Sensitive To Different Economic Conditions?

Abstract

This study examines short‐term stock price reactions to announcements of equity rights offerings in Singapore between 1983 and 2003 and investigates whether economic factors lead to different price reactions. The results show that the cumulative abnormal returns (CARs) associated with rights issues differ significantly across economic conditions at the time of issuance. Rights issues typically result in significantly large positive CARs during periods of economic growth but small positive but insignificant CARs during economic downturns. The CARs vary positively with Tobin’s q‐ratios, which indicate the availability of positive net present value investment opportunities of the firms issuing the rights. Our major finding is that the price reaction of Singapore firms to equity rights offerings is sensitive to economic conditions at the time of the rights issues.