Wealth transfers in rights offerings and the protective instruments

This study investigates the shareholder participation and wealth transfers associated with Hong Kong (HK) open offers. Compared with the results in the US where rights offerings are unpopular, open offers as one of the common rights offerings in HK also have high wealth transfers from nonparticipating to participating shareholders and low shareholder participation. High wealth transfers and low shareholder participation are thus not the main causes of the infrequent use of rights offerings in the US. High expected wealth transfers will lead to more negative announcement returns, but this adverse effect is weaker when there is a large shareholder take-up. This study for the first time finds that three main protective instruments could reduce the wealth transfers: (i) the better underwriter certification provided by the largest shareholders, (ii) the adoption of oversubscription privilege, and (iii) the avoidance of the CEO-chairman position simultaneously held by the largest shareholders.