Choice between rights issue and private placements of equity and the role of information asymmetry

Abstract

Purpose

The objective of this paper is to investigate the role of information asymmetry in the equity selling mechanisms chosen by the firms from an important emerging market, India. Specifically, the authors look into the choice between the two most popular mechanisms of equity issues – rights issue and private placement of equity.

Design/methodology/approach

This study introduces three analyst specific variables as proxies of information asymmetry as the conventional proxies are fraught with several disadvantages. First, the paper tests the choice between rights issue and private placement using a binary logistic model. In the second approach the authors use rights issue and segregate the private placements into preferential allotments and qualified institutional placements and test the impact of information asymmetry using a multinomial logistic regression.

Findings

The outcome of this empirical exercise shows that only those firms facing lesser information problems choose rights issue of equity. Private placements are chosen by firms facing higher information problems to circumvent information costs. The results remain invariant even after segregating the qualified institutional placements from private equity placement as the firms with information disadvantage choose to place equity privately.

Originality/value

In contrast to the conventional studies that focus on the debt-equity framework, the authors argue that the impact of information asymmetry is applicable even at disaggregated levels of equity selling mechanism.

Citation

Sony, B. and Bhaduri, S. (2022), "Choice between rights issue and private placements of equity and the role of information asymmetry", Managerial Finance, Vol. 48 No. 3, pp. 409-428. https://doi.org/10.1108/MF-01-2021-0023