Stock Market Reactions and Offering Discounts of Swedish Equity Issues

Abstract: This paper investigates the characteristics of rights offerings and private placements conducted by firms listed on the Stockholm Stock Exchange between 1986 and 2005. Specifically, we study stock market reactions and offering discounts at their respective announcements in order to recognize which factors the stock market takes into consideration when judging the merits of an equity issue. We find that Swedish rights offering announcements are accompanied with a negative average abnormal return of -2.0%, while private placements are associated with a 2.1% positive abnormal return. The average discounts for rights offerings and private placements amount to 40.9% and 5.5%, respectively. Swedish corporate law has a restrictive take on the acceptability of using private placements as a vehicle for issuing equity, whereas rights offerings are fully in line with current legislation. On these grounds, we interpret the merits of private placements in order to judge whether the current legislation can be motivated from a shareholder wealth perspective. Based on the results, we conclude that shareholders of firms conducting private placements are, on average, better off after the issue, whereas the opposite holds for rights issues. Thus, we argue that prohibition of private placements cannot be motivated on the basis of shareholder wealth maximization.