New equity offerings in Japan: An examination of theory and practice


The use of shareholder rights represent an important mechanism for the acquisition of new equity capital in the Japanese financial market place. Yet a theoretical understanding of how a firm selects between a rights or a public offering remains elusive. Examining those Japanese firms issuing new equity over the period, 1975-1991, we find evidence consistent with the claim of Eckbo and Masulis (1992) that incorporation of antidilution clauses in convertible issues may influence the choice of method for new equity acquisition. The price rebound in the post-offering period which is critical to the transaction cost hypothesis of Hansen (1988), however, is only inconsistently detected for our sample of Japanese firms. Likewise, we observe a minimal agency footprint on the equity acquisition process, with only the impact of managerial equity ownership consistent with Smith (1977). We do find, however, that higher-quality Japanese firms attempt to avoid the adverse valuation effects associated with the issuing of new equity by employing underwriters to reduce potential information asymmetries. This result implies that the use of rights offering in Japan may be more popular among lower-quality firms or issues with only minimal potential for appreciation. © 1997 Elsevier Science B.V.

Publication Title

Journal of International Financial Markets, Institutions and Money