306 B.E. Eckbo et al.
transfer cost associated with an uninsured rights offer increases askdecreases. eventu-
ally making it optimal to add quality certification in a standby offering. Askapproaches
zero, it is optimal to abandon rights altogether, despite the lowdirectcost of rights. In
sum, the optimal flotation method choice depends onk. It follows that, around the
world, firms gradually avoid uninsured rights in response to a gradual reduction in the
willingness of wealth-constrained shareholders to keep funding corporate growth. This
is consistent with the time-trend away from uninsured rights evidenced inTable 10and
Table 11, as average firm size also increases over time. It is also consistent with the fact
that smaller private firms, and firms listed on smaller international stock exchanges, still
use rights today.
Under the shareholder takeup model ofEckbo and Masulis (1992), the cross-sectional
variation in the use of rights is driven by factors that affect individual shareholders
wealth constraints and incentives. These factors include personal wealth and degree
of risk aversion, the magnitude of private benefits of control, and the availability of
substitute mechanisms for maintaining control benefits (e.g., restricted voting share
and pyramidal ownership structures). Regulatory changes, and changes in the issue-
technology also plays a role. For example,Ursel and Trepanier (2001)present some
evidence that the decline in Canadian rights issues to some extent coincides with regu-
latory changes—such as the expanded use of short-form prospectuses and shelf regis-
tration procedures—which lead to an increase in the relative costs of rights.
Eckbo and Norli (2004)extend the analysis ofEckbo and Masulis (1992)by formal-
izing a sequential, multistage issue game in which issuers at each stage have access to
a menu of flotation methods. At the start of the game, issuer have access to uninsured
rights, rights with standby underwriting, and private placements.^28 Consistent with the
evidence inTable 6, the direct issue costdis assumed to be lowest for uninsured rights.
The standby underwriter and private placement investor perform noisy but informative
quality certification. If, say, the private placement investor rejects purchasing the issuer
based on its private evaluation, then the issuer either decides not to issue or moves
on and decides between the remaining flotation methods in the next issue subgame.
Thus, firms select among entire issuestrategiesand not just among individual flotation
methods.
Eckbo and Norli (2004)show that there exists an equilibrium ‘pecking order’ of
flotation methods in their issue game which depends onk. Figure 3illustrates with a
numerical example this pecking order.^29 The horizontal axis plots shareholder takeupk.
The vertical axis plots total expected issue costC(k)for each of three alternative issue
strategies.C(k)—which is linear ink—incorporates the issuer’s participation constraint
(equation(1)above), so these are equilibrium strategies. Denote a particular issue strat-
egy as{x}. The steepest line inFigure 3is for the “move straight to uninsured rights and
(^28) One could substitute firm commitment underwriting for private placement without altering the basic model
insights.Eckbo and Norli (2004)use private placements as their empirical laboratory is the Oslo Stock Ex-
change where uninsured rights, standby rights and private placements are the only observed flotation methods.
(^29) See the Appendix of (Eckbo and Norli, 2004) for details of the parameter values.