Do Rights Issues Really Protect Minorities? Empirical Evidence on the Italian Case

Abstract

This paper discusses the use of rights issues in a context where interest conflicts between controlling shareholders and minorities are due to the existence of private benefits that the former can extract from the value of a traded company. While the literature considers the issue of preemptive rights as an essential tool to protect minorities from expropriation, we propose a model where rights are used to enforce the subscription of seasoned equity issues, even at negative conditions for the market. We define an abuse condition, that allows a controlling shareholder to choose discretionally an issuing price, granting a discount with respect to the market price, so that minorities either undertake the issue or place the rights, minimizing an exit cost that is, in this case, greater than zero. As the rights issue never fails under these condition, we define this phenomenon as enforced subscription. An analysis of rights issues in Italy over the decade 1996-2005 follows, providing evidence of an abuse of rights issues carried out by companies in financial distress. As rights issues at a high discount often involve an abuse of power by the controlling shareholder, we argue that their use should be carefully regulated.