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By M. Ariff, N. Salamudin, Mohamed Ariff and Norhana Salamudin


Acknowledgments: We like to acknowledge the able assistance of Taufiq Chowdhury with Eviews and TSP Programs. Salamudin records her sincere appreciation to her university, UITM, which granted her leave to undertake this study. For any errors, we are jointly responsible. On Aggregate Demand for Equity and Announcement Effect of Rights Offers This paper develops a simple model that identifies a fundamental factor, term premium, which appears to proxy for economic/market conditions, and is correlated with the aggregate demand for equity capital raised in stock exchanges. Term premium over 33 years is significantly correlated with the aggregate demand: the coefficient is also stable under different economic conditions. This is a new finding. The paper also identifies three factors correlated with share price changes at the time of seasoned stock rights offerings. The share price changes are positively correlated with (a) Tobin’s measure of investment opportunity, (b) hot market conditions and (c) economic activities. This paper traces for the first time three sources for the well-documented seasoned stock issue effect. These findings add fresh insights on an investment banking topic, on which conflicting findings about seasoned stock issuance effect have been reported. Key words: rights issues; demand for equity capital; public capital market; asymmetric information; adverse selection; NPV; economic conditions JEL Classification: G12; G24On Aggregate Demand for Equity and Announcement Effect of Rights Offers 1

Year: 2001
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