Market reaction to rights offer: A case of Johannesburg Stock Exchange

Abstract

Firms have at their disposal various sources to meet the capital requirements to fund their growth aspirations to generate sustainable shareholder wealth. Rights issues are key among this compendium of capital sources. This study investigated the short and medium-term market reaction of firms’ rights offer announcement event on the share price of Johannesburg Stock Exchange (JSE)-listed firms using an event study methodology to operationalise the research. A univariate t-test analysis determined the significance of the market price reaction post-announcement of a rights offer for JSE-listed shares. The cumulative abnormal returns (CAR) were calculated using the market model formula. The significance testing was conducted on the null hypotheses at a 5% significance level. Empirical evidence frequently indicates a significant price drop post-announcement of a rights offer. Studies indicate a general negative price reaction to announcing the rights issue on the JSE due to a dilution in earnings per share, regulation, and effects of floatation costs. This study’s results provide a contrarian view with empirical evidence indicating a significantly positive price movement of 2.30%, 2.94%, and 2.56%, respectively, from day three to five post-announcement of a rights offer. However, statistically insignificant negative price movement results were observed in the medium-term (30–252 days). The review period is from January 2006 to January 2020, covering periods from different economic cycles and the most recent data on rights offers. This study contributes to the ongoing assessment on price reaction post announcing a rights offer in the South African market