Wealth Transfer in Rights Offers: Evidence from Australia

Abstract

Using a large sample of daily ownership data, this paper investigates the wealth transfer from retail shareholders to institutional shareholders in Australian rights offers. Consistent with the wealth transfer hypothesis, we find evidence of wealth transfer from retail shareholders to institutional investors. The extent of wealth transfer does not vary significantly among different rights offer characteristics. An analysis of trading volume shows significant average abnormal trading activities around the announcement of rights offers, which indicate institutions’ buying activities during the period between the announcement date and the ex-entitlement date to obtain a larger allocation of rights. However, it is driven by a handful of institutions as the median institutions do not engage in buying activities. Using an event study, we find that price pressure has a significant effect on announcement abnormal returns. Furthermore, we show that the market reacts negatively to wealth transfer. Overall, our evidence suggests that retail shareholders suffer wealth loss in rights offers and institutions play a role in extracting wealth from retail shareholders.