A Cross-Sectional Analysis Between Effect of Rights Issue Announcements and its Determinants

Abstract

‘This study first examines the effect of rights issue announcements by Malaysian listed companies between 1987 t0 1996. In contrast o the evidence found in the United States (US), the Malaysian stock ‘market documented a statistically significant positive cumulative average abnormal return (CAAR). In an event study, this finding provides no support for the signalling models, information asymmetry model, price pressure hypothesis (PH) and perfect substitution hypothesis (PSH). Secondly, a cross-sectional regression analysis was run between cumulative abnormal return (CAR) for each company and percentage change in debtequity ratio, percentage change in working capital, percentage change in total fixed assets, relative size of rights issues, company size, subscription price discount and book-to-market equity ratio. It shows that the percentage change in debequity ratio, relative size of rights issues, subscription price discount and book-to-market equity ratio are found to be significant in explaining the average abnormal share retum movement. In contrast o the event study result, the cross-sectional analysis findings lend support to the PPH. An unexpected important issue ‘which has emerged from the study is evidence for information leakage and share return reaction many days before the official announcement.