308 B.E. Eckbo et al.
expected to be fully subscribed with the help of outside investors. There is growing ev-
idence to support this prediction.Eckbo and Masulis (1992)andSingh (1997)report
that the average level of shareholder takeup in U.S. rights offers is greater in uninsured
rights offers than in standbys.Eckbo and Masulis (1992)also find that firms obtain
substantial levels of subscription precommitments from large shareholders prior to se-
lecting the uninsured rights method, with few such precommitments in standby rights.
Information on subscription precommitments are published in the offering prospectus
and are empirically useful in predictingk. As reviewed in Section3 above, there is also
substantial evidence more generally that flotation costs are lower for firms with greater
ownership concentration, which are also the firms that tend to have greater values fork.
Internationally, where the rights method is much more prevalent, there is also sub-
stantial evidence consistent with a key role for shareholder takeupk. Bøhren, Eckbo,
and Michalsen (1997)andCronqvist and Nilsson (2005)study rights offers on the Oslo
and Stockholm stock exchanges, respectively, and use the trading volume in rights to
directly measurek.^30 They find that rights are more likely to be selected the greater the
value ofk. Moreover,Bøhren, Eckbo, and Michalsen (1997)show that the probability
of switching from uninsured rights to standby rights declines withk, as predicted by
Eckbo and Masulis (1992)andEckbo and Norli (2004). Slovin, Sushka, and Lai (2000)
find that the level of subscription levels is similar in standbys and uninsured rights in
the U.K.^31 In their sample of French SEOs,Gajewski and Ginglinger (2002)report a
greater ownership concentration for uninsured rights issuers than for standby rights is-
suers, and the lowest ownership concentration for underwritten public offerings. They
also report that share allocations not taken up by the issuer’s blockholders is much larger
for underwritten public offerings than for uninsured rights and standbys. Using annual
data on share ownership in Italy,Bigelli (1998)report that insiders’ level of shareown-
ership remains stable through the year of a rights offering, which is consistent with a
high value ofk.
4.3. Predicting the market reaction to issue announcements
Table 12summarizes the empirical predictions of the adverse selection, shareholder
takeup and pecking order theories for the stock market reaction to issue announce-
ments as a function of the flotation method.Table 12is restricted to models in which
the firm considers issuing common stock only. The choice between different types of
securities—the capital structure choice—is covered in several other chapters throughout
this Handbook, and has also been previously reviewed byHarris and Raviv (1991).
LetARdenote the announcement-induced abnormal stock return of the issuer. We
first discuss predictions forARof models with only asingleflotation method, of which
Myers and Majluf (1984)is the most prominent. These models provide a useful starting
(^30) Rights are traded on stock exchanges. If rights trade only once (sold by a current shareholder to an outside
investor), then the trading volume in rights measure 1−kdirectly.
(^31) However, it is not clear from their study whether their “takeup” variable reflects total rights-subscription
levels or only subscriptions by current shareholders.