Pricing errors in ginnish rights offerings? - Implications for market efficiency in NASDAQ OMX Helsinki

Abstract

OBJECTIVES OF THE STUDY:

The primary objective of the study is to find whether the subscription rights trade at their fundamental values in Finnish rights offerings. The secondary objectives of the study are to find whether the stock price of the issuing firm correctly adjusts to the de-attachment of the rights on ex-rights day; if there is an announcement date effect on the date of announcement; and how large is the discount to theoretical ex-rights price used in pricing of the offerings.

DATA:

The data on rights offerings and historical share prices is sourced from Nasdaq OMXH Stock Exchange. The sample of offerings is downloaded with use of Bloomberg Professional. The sample consists of all executed rights offerings in OMX Helsinki and its predecessor Helsinki Stock Exchange during time period 2003 - 2013. The size of the sample is 45 rights offerings. Characteristics of the rights offerings are picked from respective stock exchange announcements.

FINDINGS OF THE STUDY:

The study finds that on average the subscription prices trade at 20,4 percent discount to their fundamental values when measured by daily closing prices. Other findings include the stock prices to underreact to the de-attachment of the rights; the abnormal return on the announcement date to equal -1,3 percent; and the discount to theoretical ex-rights price to equal 36,0 percent. The study does not argue that abnormal gains can be experienced in practice by participating in rights offerings but implies that it could be highly possible.