Why are rights offers in Hong Kong so different?

• The negative price reaction to rights offers in Hong Kong is extremely high.
• Investors react more adversely to those rights offers with high private benefits.
• Poor quality firms and cash-rich firms with less growth prospects choose rights offers.
• Investors react favorably to private placements with high growth opportunities.
• No monitoring role played by new blockholders in private placements.

Investors react adversely to the announcements of rights offers in Hong Kong and the abnormal return of rights offers on the announcement day is − 12.10%. After taking price discounts, underwriting fees and abnormal returns into consideration, the total direct and indirect costs of the seasoned issuers of rights offers are tremendously high. The cross-sectional analysis shows that investors react more adversely to the issuers of rights offers with lower growth prospects, higher free cash flows, larger issue scales, lower pre-issuance stock run up and higher debt capacity. Our empirical result also indicates that cash-rich firms with few investment opportunities and firms with poor quality in terms of lower market-to-book ratio and larger price discounts choose rights offers over private equity placements. All this evidence supports that agency costs and private benefits of control matter in equity financing.