Stock Price Behaviour Of Malaysian Rights Issue On The Announcement And Ex-Right Dates

Abstract

‘This study examines the announcement and ex-right effect of rights issue during the period from January 1980 to December 1995. The announcement effect of Malaysian rights issue shows a significant price decline, consistent with information asymmetry hypothesis of Myers and Majluf (1984). However, the magnitude of such decline is much smaller compared to the U.S. evidence, -1.59 percent vs 3.14 percent as documented by Asquith and Mullins (1986). Upon further investigation to determine whether there is any difference in investors" behaviour based on the purpose of issuing righ, it was found that equity raised for investment purpose experiences insignificant announcement day price decline of ~1.34 percent vs 2.04 percent for those under deb retirement purpose. The returns for both sub-samples differ significantly from one another, giving support to the good news hypothesis suggested for Korea (Kim and Lee, 1990). The ex-right date effect indicates that price adjustment is not efficient until aftr the exeright date, contrary to the belief that such adjustment should be mechanical. The result shows that on the ex-right date investors can eam a significant positive return of 9.05 percent, consistent with findings in the Singapore and Japanese markets that report price increases of 5.7 percent and 7.1 percent respectively. This result suggests presence of profit arbitraging opportunity in the Malaysian market that would enable investors to earn a significant positive abnormal return.