Abstract
We study the offer choice between rights and firm commitments for a sample of industrial firms issuing equity in the 1930's and 1940's. Unlike existing studies, our sample is drawn from a time period when rights were as common an offer method for industrial firms as were firm commitments. This sample allows us to perform out-of-sample tests of existing theories of offer choice. Our analysis indicates that firms choosing rights were larger, healthier firms with lower leverage and higher cash flow liquidity. Firms electing the firm commitment method experienced significantly negative size-adjusted returns during the 12 months following the offer, consistent with recent evidence for SEO's. In striking contrast, firms issuing equity through rights were not subject to negative post-offer returns, suggesting that firm commitments were timed to exploit overvaluation while rights offers were not. Finally, we investigate a number of long term factors that could have contributed to the decision to migrate from rights issues to firm commitment.
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