Pre-Emptive Rights – A Theoretical and Empirical Examination
-
Lawrence Haar
and
Andros Gregoriou
Abstract
The premise for protecting shareholders from dilution, a loss of wealth and control through providing pre-emptive rights, is that agents may not act in the interests of principals. Proponents of pre-emptive rights emphasize protecting the democratic nature of the limited liability corporation while opponents argue that professional management have greater insights regarding capital formation and growth opportunities. From a financial theory perspective, the argument for protection rests upon whether the costs of debt and of equity reflect capital structure as well as the potential for changes, as ultimately reflected in share prices. Applying financial theory and statistical analysis, we explore if shareholders need protection from dilution, or if the risks are already capitalised into share prices. Our findings and insights cast doubt on the benefits of such protection and the legal basis for compensation.
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Ethical statement declaration: The submitted article entitled, ‘Pre-emptive Rights Issues: A Theoretical and Empirical Examination’ is an observational study using publicly available, third-party generated, financial data downloaded from the Bloomberg® Information Service. Given the nature of the data utilised, the authors sought no ethical approval from the University of Brighton Research Ethics Committee. Further, the authors declare that there was no conflict of interest in producing this research.
Appendix I: Example of Earnings Dilution
Dilution affects the value of a share holding according to the number of additional shares issued and the number of shares held. Dilution affects the earnings per share (EPS) of the company and consequently the price of shares, which typically sell at a multiple of earnings.
As an illustration, in the following example we have a firm doubling its share issuance thereby spreading the same earnings over greater number of shares, i.e. dilution. Book value may fall as well. We see the EPS falls from £1.00 to £0.50 per share after the number of shares are doubled from 100 to 200. The market capitalisation is unchanged as the price earnings ratio is assumed to be unchanged. But shareholder ‘A’ has seen his earnings fall by 50 %.
| Example of earnings dilution per share outstanding | |
|---|---|
| Issued shares before dilution | 100 |
| Total earnings | £ 100.00 |
| Earnings per share pre-issuance | £ 1.00 |
| Price/earnings ratio | 10 |
| Market value of total shares capital pre-issuance | £ 1,000.00 |
| Additional share issuance | 100 |
| Total shares outstanding | 200 |
| Ownership by shareholder ‘A’ 10 % | 10 % |
| Shares owned by shareholder ‘A’ pre-issuance | 10 |
| Earnings of shareholder a pre-issueance | £ 10.00 |
| Percent ownership no take-up/no rights | 5 % |
| Shares owned by ‘A’ post issuance | 10 |
| Earnings per share post issuance | £ 0.50 |
| Earnings of ‘A’ post issuance | £ 5.00 |
| Market value of total shares post-issuance | £ 1,000.00 |
It is possible that the issuance of new shares may suggest a firm has new growth opportunities in which case, if the dilution leads to an increase in earnings, then earnings may not be diluted. The issuance may ‘signal’ to the market that the firm has improved growth prospects leading to a higher price to earnings ratio and greater market capitalisation. Investigating how changes to capital structure may impact valuation through signalling is a non-equilibrium approach as first introduced by Ross (1977). It is outside the focus of our research (Public companies may also calculate diluted EPS to determine the potential effect of dilution on stock prices in case share options are exercised).
As explained analytically in the Literature Review; to analyse the effect on firm valuation, however, we need to look at the entire capital structure of debt and equity moving from an accounting to a financial theory perspective on how changes to capital structure may impact valuation. Under MM Theory, the price of equity and debt adjusts to changes in capital structure. Unless there is tax benefit (interest deductibility) from debt, the value of the firm is invariant to adjustments in capital structure. If the cost of capital takes into account, ex ante, the potential for changes to new share issuance or for that matter any change to capital structure, the overall valuation of the firm, the market capitalisation of equity minus debt, should not change, unless the aforementioned signalling argument is relevant. If the potential for changes to capital structure, ex ante, are not capitalised into the cost of debt and equity, according to Option Theory, then redistributions of wealth between shareholders and bond holders may occur along with changes to valuation. In either paradigm, wealth transfer between existing shareholders and new shareholders may occur according to equations (3) and (4). Whether the extent of protection from dilution is embodied in the share prices is the subject of our empirical event analysis.
Appendix II: EU Rights Issues (Source: Bloomberg Corporate Action Calendar. Note: Repetitions Reflect Multiple Listings)
| Announcement date | Security ID |
|---|---|
| 29/06/2017 | ELT3EUR EU equity |
| 29/06/2017 | LONG EU equity |
| 30/06/2017 | SVHEUR EU equity |
| 30/06/2017 | TKO1EUR EU equity |
| 30/06/2017 | ODX EU equity |
| 30/06/2017 | ALHYGEUR EU equity |
| 30/06/2017 | VER2 EU equity |
| 30/06/2017 | TRP1EUR EU equity |
| 30/06/2017 | TRP1 EU equity |
| 30/06/2017 | 700EUR EU equity |
| 30/06/2017 | WESCEUR EU equity |
| 30/06/2017 | WESC EU equity |
| 03/07/2017 | BSYXFEUR EU equity |
| 03/07/2017 | AEBEUR EU equity |
| 03/07/2017 | JINGBX EU equity |
| 03/07/2017 | JIN EU equity |
| 03/07/2017 | JINEUR EU equity |
| 04/07/2017 | ESPGBX EU equity |
| 04/07/2017 | ESPEUR EU equity |
| 06/07/2017 | SCE1 EU equity |
| 06/07/2017 | SCE1EUR EU equity |
| 06/07/2017 | EKIEUR EU equity |
| 06/07/2017 | HNRGBX EU equity |
| 06/07/2017 | INY EU equity |
| 10/07/2017 | TPGGBX EU equity |
| 10/07/2017 | TPGEUR EU equity |
| 10/07/2017 | V3V EU equity |
| 11/07/2017 | ALODIEUR EU equity |
| 12/07/2017 | AVXEUR EU equity |
| 12/07/2017 | 4INEUR EU equity |
| 12/07/2017 | 4IN EU equity |
| 12/07/2017 | EQNGBX EU equity |
| 12/07/2017 | EQNEUR EU equity |
| 14/07/2017 | CNMI EU equity |
| 14/07/2017 | CNMIEUR EU equity |
| 17/07/2017 | VXREUR EU equity |
| 17/07/2017 | 0QDWEUR EU equity |
| 17/07/2017 | 0QDW EU equity |
| 18/07/2017 | GFC EU equity |
| 18/07/2017 | GFCGBX EU equity |
| 19/07/2017 | ZMIEUR EU equity |
| 19/07/2017 | EKSOEUR EU equity |
| 23/07/2017 | 861EUR EU equity |
| 24/07/2017 | ALNAVEUR EU equity |
| 24/07/2017 | PICOEUR EU equity |
| 27/07/2017 | MYRN EU equity |
| 27/07/2017 | MYRNEUR EU equity |
| 28/07/2017 | FAM2EUR EU equity |
| 28/07/2017 | 876EUR EU equity |
| 31/07/2017 | MZZEUR EU equity |
| 31/07/2017 | INK1EUR EU equity |
| 31/07/2017 | VJBA EU equity |
| 31/07/2017 | VJBAEUR EU equity |
| 31/07/2017 | FAM1 EU equity |
| 01/08/2017 | BRU1EUR EU equity |
| 02/08/2017 | WEB1EUR EU equity |
| 03/08/2017 | BYOT EU equity |
| 03/08/2017 | BYOTEUR EU equity |
| 04/08/2017 | AZMEUR EU equity |
| 04/08/2017 | AYC EU equity |
| 04/08/2017 | ACZ EU equity |
| 05/08/2017 | POLYEUR EU equity |
| 05/08/2017 | POLY EU equity |
| 08/08/2017 | IODEUR EU equity |
| 08/08/2017 | FFXGBX EU equity |
| 10/08/2017 | CTPEUR EU equity |
| 11/08/2017 | CIN1 EU equity |
| 15/08/2017 | MEOEUR EU equity |
| 15/08/2017 | 4L4 EU equity |
| 15/08/2017 | 4L4EUR EU equity |
| 17/08/2017 | RFVVFEUR EU equity |
| 17/08/2017 | DRYSEUR EU equity |
| 18/08/2017 | GETIBEUR EU equity |
| 18/08/2017 | GETIBUSD EU equity |
| 18/08/2017 | GETIB EU equity |
| 18/08/2017 | GETIBGBX EU equity |
| 18/08/2017 | 6S6EUR EU equity |
| 18/08/2017 | 6S6 EU equity |
| 22/08/2017 | SPAGSEK EU equity |
| 22/08/2017 | GABIGBX EU equity |
| 25/08/2017 | MSBEUR EU equity |
| 25/08/2017 | FINLEUR EU equity |
| 28/08/2017 | MRG1EUR EU equity |
| 28/08/2017 | ESUN EU equity |
| 28/08/2017 | EILEUR EU equity |
| 28/08/2017 | BELEEUR EU equity |
| 28/08/2017 | BELEUSD EU equity |
| 28/08/2017 | BELE EU equity |
| 28/08/2017 | ERRES EU equity |
| 29/08/2017 | COE1EUR EU equity |
| 30/08/2017 | MWREUR EU equity |
| 30/08/2017 | INSREUR EU equity |
| 30/08/2017 | INSRNOK EU equity |
| 30/08/2017 | HOVDSEK EU equity |
| 30/08/2017 | BNT EU equity |
| 31/08/2017 | IHLEUR EU equity |
| 31/08/2017 | MLFXOEUR EU equity |
| 01/09/2017 | CEABSEK EU equity |
| 01/09/2017 | OPTISEK EU equity |
| 01/09/2017 | JXR EU equity |
| 01/09/2017 | CSSOFEUR EU equity |
| 01/09/2017 | CSSOFSEK EU equity |
| 04/09/2017 | EEM EU equity |
| 04/09/2017 | PLE1 EU equity |
| 05/09/2017 | WNTSEK EU equity |
| 05/09/2017 | EURIB EU equity |
| 06/09/2017 | SND1EUR EU equity |
| 06/09/2017 | OGXEUR EU equity |
| 06/09/2017 | HMXEUR EU equity |
| 06/09/2017 | CUR1 EU equity |
| 06/09/2017 | GTGMTSEK EU equity |
| 07/09/2017 | LBKEUR EU equity |
| 07/09/2017 | LBKUSD EU equity |
| 08/09/2017 | ULEDMSEK EU equity |
| 11/09/2017 | STEL EU equity |
| 11/09/2017 | SFP1 EU equity |
| 11/09/2017 | ARV2EUR EU equity |
| 12/09/2017 | ACAD1EUR EU equity |
| 12/09/2017 | ACADSEK EU equity |
| 13/09/2017 | MONT EU equity |
| 13/09/2017 | MONTGBX EU equity |
| 14/09/2017 | REALMSEK EU equity |
| 14/09/2017 | SALBEUR EU equity |
| 14/09/2017 | SALB EU equity |
| 14/09/2017 | VIPRO EU equity |
| 14/09/2017 | VIPROEUR EU equity |
| 15/09/2017 | SBX EU equity |
| 15/09/2017 | SBXGBX EU equity |
| 15/09/2017 | SBXEUR EU equity |
| 18/09/2017 | TRC1EUR EU equity |
| 19/09/2017 | SYR1EUR EU equity |
| 19/09/2017 | PCA1 EU equity |
| 19/09/2017 | NRENCHF EU equity |
| 20/09/2017 | BSMEUR EU equity |
| 20/09/2017 | FRIGO EU equity |
| 21/09/2017 | CCT2EUR EU equity |
| 21/09/2017 | 943EUR EU equity |
| 22/09/2017 | MPENSEK EU equity |
| 25/09/2017 | SENS EU equity |
| 25/09/2017 | SENSEUR EU equity |
| 26/09/2017 | POH1 EU equity |
| 26/09/2017 | POH1EUR EU equity |
| 26/09/2017 | 6S5 EU equity |
| 26/09/2017 | 6S5EUR EU equity |
| 26/09/2017 | STACHF EU equity |
| 28/09/2017 | BPT1EUR EU equity |
| 28/09/2017 | DONEUR EU equity |
| 28/09/2017 | DON EU equity |
| 28/09/2017 | PRLEUR EU equity |
| 28/09/2017 | CSHGBX EU equity |
Appendix III: UK Rights Issues (Source: Bloomberg UK Corporate Action Calendar)
| Announcement date | Security ID |
|---|---|
| 05/01/2010 | STA LN equity |
| 14/01/2010 | MMC LN equity |
| 27/01/2010 | SPO LN equity |
| 02/02/2010 | HAMP LN equity |
| 11/02/2010 | VER LN equity |
| 15/02/2010 | MXF LN equity |
| 05/03/2010 | KMR LN equity |
| 05/03/2010 | AXN LN equity |
| 11/03/2010 | HGT LN equity |
| 23/03/2010 | VKW LN equity |
| 26/03/2010 | PSPI LN equity |
| 31/03/2010 | FWUK LN equity |
| 01/04/2010 | CMIP LN equity |
| 01/04/2010 | BNK LN equity |
| 26/04/2010 | BKIR LN equity |
| 26/04/2010 | BIRG LN equity |
| 27/04/2010 | FPM LN equity |
| 30/04/2010 | BSLA LN equity |
| 02/05/2010 | NHY LN equity |
| 05/05/2010 | DEO LN equity |
| 14/05/2010 | MFX LN equity |
| 20/05/2010 | NG/LN equity |
| 26/05/2010 | BGBL LN equity |
| 27/05/2010 | BIOM LN equity |
| 28/05/2010 | JRIC LN equity |
| 04/06/2010 | CRND LN equity |
| 07/06/2010 | TRT LN equity |
| 07/06/2010 | PRM LN equity |
| 10/06/2010 | BCAP LN equity |
| 15/06/2010 | NMB LN equity |
| 15/06/2010 | NMBA LN equity |
| 24/06/2010 | FLG LN equity |
| 25/06/2010 | AVE LN equity |
| 25/06/2010 | GPRT LN equity |
| 07/07/2010 | WATR LN equity |
| 22/07/2010 | UAI LN equity |
| 02/08/2010 | EVOL LN equity |
| 17/08/2010 | EVN LN equity |
| 17/08/2010 | RECI LN equity |
| 20/08/2010 | CFU LN equity |
| 26/08/2010 | SPH LN equity |
| 08/09/2010 | TAN LN equity |
| 17/09/2010 | SGZ LN equity |
| 23/09/2010 | HIW LN equity |
| 23/09/2010 | 1876652D LN equity |
| 01/10/2010 | IAEM LN equity |
| 01/10/2010 | IAES LN equity |
| 05/10/2010 | AAT LN equity |
| 13/10/2010 | STAN LN equity |
| 20/10/2010 | POWR LN equity |
| 21/10/2010 | XAR LN equity |
| 02/11/2010 | BVA LN equity |
| 03/11/2010 | SCE LN equity |
| 04/11/2010 | DME LN equity |
| 08/11/2010 | NEPI LN equity |
| 12/11/2010 | TPG LN equity |
| 16/11/2010 | HICL LN equity |
| 16/11/2010 | 1707299D LN equity |
| 17/11/2010 | MWH LN equity |
| 30/11/2010 | XEL LN equity |
| 30/11/2010 | UBG LN equity |
| 03/12/2010 | FCSS LN equity |
| 07/12/2010 | NAD LN equity |
| 07/12/2010 | IVO LN equity |
| 07/12/2010 | IVO LN equity |
| 10/12/2010 | DGN LN equity |
| 13/12/2010 | SYNT LN equity |
| 13/12/2010 | OXB LN equity |
| 14/12/2010 | OTE LN equity |
| 16/12/2010 | RPC LN equity |
| 24/12/2010 | JJB LN equity |
| 13/01/2011 | TILS LN equity |
| 19/01/2011 | AGR LN equity |
| 02/02/2011 | AEX LN equity |
| 02/02/2011 | MXF LN equity |
| 04/02/2011 | AXS LN equity |
| 11/02/2011 | STU LN equity |
| 02/03/2011 | FWEB LN equity |
| 02/03/2011 | AUSC LN equity |
| 08/03/2011 | QFI LN equity |
| 14/03/2011 | ALTN LN equity |
| 16/03/2011 | FTV LN equity |
| 31/03/2011 | ABL LN equity |
| 01/04/2011 | CIN LN equity |
| 06/04/2011 | JJB LN equity |
| 06/04/2011 | CZB LN equity |
| 06/04/2011 | CZB LN equity |
| 13/04/2011 | HSTN LN equity |
| 21/04/2011 | ESKN LN equity |
| 27/04/2011 | SLN LN equity |
| 11/05/2011 | PTY LN equity |
| 17/05/2011 | SFI LN equity |
| 19/05/2011 | LAM LN equity |
| 23/05/2011 | ELR LN equity |
| 26/05/2011 | SBT LN equity |
| 31/05/2011 | SLI LN equity |
| 03/06/2011 | IPO LN equity |
| 03/06/2011 | BKIR LN equity |
| 03/06/2011 | BIRG LN equity |
| 20/06/2011 | 1500248D LN equity |
| 05/07/2011 | PXS LN equity |
| 06/07/2011 | QRM LN equity |
Appendix IV: US Rights Issues (Source: Bloomberg UK Corporate Action Calendar)
| Announcement date | Security ID |
|---|---|
| 01/06/2010 | UNCFF US |
| 01/06/2010 | UNCIF US |
| 02/10/2010 | SRMGF US |
| 04/17/10 | CWBC US |
| 04/26/10 | SNV US |
| 04/26/10 | BKRIF US |
| 05/25/10 | HAFC US |
| 08/18/10 | RCBC US |
| 09/08/2010 | NBGIF US |
| 09/13/10 | DB US |
| 09/15/10 | NBGIF US |
| 10/13/10 | SCBFF US |
| 10/29/10 | BPIRF US |
| 11/02/2010 | BBVXF US |
| 11/23/10 | CPF US |
| 12/23/10 | FMNB US |
| 01/10/2011 | FMBM US |
| 02/10/2011 | DNSKF US |
| 02/17/11 | CPF US |
| 02/24/11 | UCBI US |
| 03/29/11 | BKIMF US |
| 04/06/2011 | IITSF US |
| 04/06/2011 | CRZBF US |
| 04/06/2011 | CRZBF US |
| 04/06/2011 | IITOF US |
| 04/11/2011 | BMDPF US |
| 04/20/11 | BPCGF US |
| 04/26/11 | MCBC US |
| 05/19/11 | BPCGF US |
| 06/03/2011 | BKRIF US |
| 07/29/11 | SMMF US |
| 10/06/2011 | UVSP US |
| 11/07/2011 | BORT US |
| 11/08/2011 | CCBC US |
| 11/14/11 | UNCIF US |
| 11/14/11 | UNCFF US |
| 11/15/11 | IBCP US |
| 11/22/11 | CFBK US |
| 02/01/2012 | SRMGF US |
| 02/27/12 | BNDSF US |
| 02/28/12 | FXNC US |
| 04/25/12 | FFBB US |
| 05/08/2012 | LYBC US |
| 09/07/2012 | BPCGF US |
| 09/25/12 | HTBI US |
| 02/20/13 | BKIMF US |
| 04/10/2013 | CBKM US |
| 05/02/2013 | ALBKF US |
| 05/14/13 | CRZBF US |
| 05/23/13 | NBGIF US |
| 2013/01/07 | EPGNF US equity |
| 2013/01/10 | PTUUF US equity |
| 2013/01/18 | WWR US equity |
| 2013/01/22 | NTCXF US equity |
| 2013/01/24 | GIGA US equity |
| 2013/01/25 | LNNGF US equity |
| 2013/01/28 | IESC US equity |
| 2013/01/30 | UGDIF US equity |
| 2013/01/30 | WEBNF US equity |
| 2013/01/30 | DOMH US equity |
| 2013/01/31 | RCMT US equity |
| 2013/02/04 | NEPH US equity |
| 2013/02/05 | KKPNF US equity |
| 2013/02/05 | CACH US equity |
| 2013/02/06 | QBAK US equity |
| 2013/02/13 | BWEN US equity |
| 2013/02/21 | NAUBF US equity |
| 2013/02/22 | BXC US equity |
| 2013/02/25 | NOURF US equity |
| 2013/02/27 | ASPCQ US equity |
| 2013/02/27 | MMTMF US equity |
| 2013/03/01 | PBA US equity |
| 2013/03/04 | PTNUF US equity |
| 2013/03/15 | YOOIF US equity |
| 2013/03/19 | ETFLF US equity |
| 2013/03/21 | CTUNF US equity |
| 2013/03/21 | NCFFF US equity |
| 2013/03/28 | MYBUF US equity |
| 2013/03/28 | NUSMF US equity |
| 2013/04/02 | PRRUF US equity |
| 2013/04/03 | SBFFF US equity |
| 2013/04/03 | BVLDF US equity |
| 2013/04/10 | CBKM US equity |
| 2013/04/10 | SNMYF US equity |
| 2013/04/15 | MNSEF US equity |
| 2013/04/22 | CNNEF US equity |
| 2013/04/23 | BVDRF US equity |
| 2013/04/24 | GEAHF US equity |
| 2013/04/25 | WRN US equity |
| 2013/04/26 | FORD US equity |
| 2013/05/02 | ALBKF US equity |
| 2013/05/02 | SBLK US equity |
| 2013/05/07 | MLMZF US equity |
| 2013/05/07 | BABB US equity |
| 2013/05/09 | BARUF US equity |
| 2013/05/10 | COHN US equity |
| 2013/05/14 | CRZBF US equity |
| 2013/05/14 | CFXTF US equity |
| 2013/05/15 | SRLTF US equity |
| 2013/05/15 | QTEYF US equity |
| 2013/05/15 | TNREF US equity |
| 2013/05/15 | CEGMF US equity |
| 2013/05/16 | ACKRF US equity |
| 2013/05/16 | ABCFF US equity |
| 2013/05/17 | TGB US equity |
| 2013/05/20 | FGROF US equity |
| 2013/05/20 | PPCCF US equity |
| 2013/05/21 | AXR US equity |
| 2013/05/21 | MGMLF US equity |
| 2013/05/22 | AUNFF US equity |
| 2013/05/23 | NBGIF US equity |
| 2013/05/24 | PLM US equity |
| 2013/05/24 | NWSA US equity |
| 2013/05/24 | NWS US equity |
| 2013/05/24 | CYH US equity |
| 2013/05/27 | FNCJF US equity |
| Daily price volatility comparisons as used to control for percentage changes of Table 2. | |
|---|---|
| EU share prices | 10.9357 % |
| US share prices | 1.1322 % |
| United kingdom share prices | 0.1597 % |
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Articles in the same Issue
- Frontmatter
- Editorial
- Laudatio: Christoph Engel
- Articles
- Pre-Emptive Rights – A Theoretical and Empirical Examination
- The Value of Control in Private Companies
- The Direct Incidence of Product Liability on Wages
- The Hard Pursuit of Optimal Vaccination Compliance in Heterogeneous Populations
- Revival Churches Abuses and Well-Being in Cameroon
Articles in the same Issue
- Frontmatter
- Editorial
- Laudatio: Christoph Engel
- Articles
- Pre-Emptive Rights – A Theoretical and Empirical Examination
- The Value of Control in Private Companies
- The Direct Incidence of Product Liability on Wages
- The Hard Pursuit of Optimal Vaccination Compliance in Heterogeneous Populations
- Revival Churches Abuses and Well-Being in Cameroon
