Wrong for rights? Short sales in the global rights issues market ∗

Wai-Man Liu† Peter Pham‡ Cameron Yuen§

June 14, 2019

Abstract

Rights issues are intended to safeguard existing shareholder interests, but attract per-plexingly low shareholder participation. Using a comprehensive cross-country dataset,we study the vulnerability of uninformed shareholders in rights-issuing firms againstpotential market distortions created by short sales. We document that rights on av-erage lose about a third of their value as short activity increases during the relativelyinformation-void period from the ex-rights date to the completion of an issue. Shortconstraint measures explain both the issue-period rights value decline and post-issueprice reversal patterns. We use regression discontinuity designs to address endogeneityand a special type of dual-tranche rights issues to estimate the wealth loss of retailshareholders. Our evidence highlights the need for further strengthening rights issueregulations in trading environments where short-related investor protection is still ar-bitrary.

Keywords: Short selling, rights issues, market regulations.

JEL Codes: G14, G32

∗We thank Kee-Hong Bae, Truong Duong, Mia Pham, conference participants in the Financial ResearchNetwork (FIRN) annual conference, the Northern Finance Association annual meeting, the Vietnam Inter-national Conference in Finance, and seminar participants at Massey University, University of New SouthWales, University of Western Australia, and University of Wollongong for their suggestions.

†Research School of Finance, Actuarial Studies & Statistics, ANU‡Corresponding author. School of Banking and Finance, UNSW Sydney§Commonweatlh Bank of Australia, Sydney

“In current market conditions, there is increased potential for market abuse through short

selling during rights issues. As a result there has been severe volatility in the shares of

companies conducting rights issues. This is potentially damaging not only to the issuers in

question but also to confidence in the overall fairness and quality of the UK market. It can

be particularly prejudicial to the interests of small investors.”

FSA Press Release, 13 June 2008

On the 13th June 2008, the UK Financial Services Authority (FSA) released a directive

mandating the disclosure of large short positions in stocks undertaking rights issues. Part

of a suite of measures aimed at curbing excess volatility during the 2008 financial crisis, the

new disclosure rule highlights the regulator’s particular concern about the integrity of the

rights offering process. In this context, the role of short selling is still ambiguous. Although

the consensus in the literature is that short sales on average improve the informational

efficiency of stock prices, some theories (such as Brunnermeier and Pedersen (2005) and

Goldstein and Guembel (2008)) suggest that they can also create market distortions in

certain circumstances. A rights issue may present one such special trading situation because

it requires all existing shareholders of the firm to make share subscription decisions that are

susceptible to market states with temporary excess volatility and uninformative stock prices.

Using a large dataset of rights issues from around the world, our study examines whether

short selling can distort the integrity of the rights issue process and make it less attractive to

shareholders. We analyze how short activity varies around the completion of a right issue and

estimate the impact of short constraints on rights value. We also focus on a unique setting

where rights issues are conducted in separate tranches for different shareholders. This allows

us to investigate whether the consequences of market distortions are asymmetric: that is,

small retail shareholders may be particularly disadvantaged due to the high subscription and

information costs that they face in handling their rights.

There has been very limited evidence on the interaction between secondary market trad-

ing and the conduct of a rights issue, which is puzzling given that these issues are still an

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economically important form of capital raising in international equity markets outside the

US. According to our data, they make up on average over a quarter of the aggregate proceeds

of non-US seasoned equity offerings (SEOs). From a legal theory perspective, any adverse

effect of market trading on rights issues would also be a major concern as it directly chal-

lenges the doctrine that historically created rights issues to safeguard shareholder interests:

that is, they have the “right of first refusal” over any offer of shares by the company. This

and other regulations (such as prospectus requirements, rights transferability, and fixed offer

schedules) remain popular today around the world, as they are thought to provide necessary

protection for minority shareholders from wealth transfers and dilution in a capital raising

transaction.

However, the FSA’s action mentioned above and a number of controversies alleged to

have involved abuses of the rights issue process suggest that even greater protection of

rights recipients may be required.1 Academic studies also argue that the lack of adequate

protection explains the demise of rights issues in some markets. For example, Kothare (1997),

Rantapuska and Knupfer (2008), and Holderness and Pontiff (2016), show that instead of

preserving existing ownership structures, rights issues tend to have low takeup rates and

result in increased ownership concentration, indicating that some shareholders experience

wealth losses in the process.

The ability to distort market prices, especially through shorting, can exacerbate such

shareholder losses. This possibility has been considered outside of the rights issue context in

a theory developed by Gerard and Nanda (1993). They suggest that, in a firm-commitment

public offering, informed traders have an incentive to trade against their private information

to make market prices less informativeness, thereby worsening the winner’s curse problem

and forcing the underwriter to set a larger issue discount. Allowing short activity to be

1For example, the £4 billion rights offer failure by HBOS in 2008 in the UK illustrates the substantialconsequences of short selling during rights issues. Over the course of the two month offering, HBOS shareprice collapsed as it emerged that Harbinger Capital had naked short sold £300 million worth of HBOSshares. By the end of the issue, HBOS’s market price had dropped over 50%, breaching its issue price anddriving down shareholder takeup rate (to 8.3%).

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unconstrained may further encourage such strategic trading behavior as it becomes more

feasible for informed traders to conceal their information.

Specific features of rights issues make this type of transactions even more susceptible to

price distortion than the SEO setting considered in the Gerard and Nanda (1993) theory.

First, unlike firm-commitment public offerings which are mainly marketed to sophisticated

institutional investors, rights issues force all existing shareholders, whether informed or unin-

formed, to make subscription decisions on an individual basis. Second, whereas the distortion

strategy in the Gerard and Nanda (1993) model is aimed at marginally increasing the SEO

discount, the discount in a rights issue is set ex ante to generate value for the rights. Third,

rights holders may individually face high costs of subscription and may be forced to forfeit

or sell their rights at deep discounts when the underlying stock prices are under pressure.

We use a simple model to illustrate how these specific features can exacerbate short-

related price distortion. Our model considers the scenario where an informed trader can

strategically short to depress stock price and benefit from uninformed rights holders selling

their rights when price falls. The strategy reflects the trade-off faced by the informed trader:

while the gain from generating negative price pressure increases with short volume, the

informed trader must bear the (convex) costs created by short selling restrictions. Unlike

the informed trader, we show that an uninformed speculator has no incentive to short. To

motivate our empirical analysis, our model predicts that short activity increases while stock

price declines during the execution of a rights issue and that these changes vary with the

extent of short restrictions and rights issue characteristics.

Our empirical analysis is conducted on 11,918 rights issues by 7,479 firms in 43 countries

from 2002 to 2014. To the best of our knowledge, this is the most comprehensive international

dataset on rights issues. An important novel feature of our data is the precise time schedule

of each issue. We focus on the issue execution period that follows its announcement - from

the ex-rights date to the final settlement and listing of new shares (hereafter referred to as the

listing date). This is a very different empirical setting to those in extant studies, which have

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mostly focused on the announcement date to measure the informational content of a rights

issue.2 An important point to note about the execution period is that it generally begins

well after all information about an issue, including the issue price, has been released to the

market (the average gap between the announcement date and the ex-rights date in our sample

is 9 trading days), and therefore should not be characterized by any clear and consistent

information-related adjustments in stock prices. We argue that this period is nevertheless

structurally important to both short sellers’ and rights holders’ decision making. During the

cum-rights period, short sellers may be constrained by a difficulty to borrow shares and/or

the need to deliver both rights and shares. For existing shareholders, the execution period is

when they have to make decisions on whether to sell their rights, subscribe for new shares,

and sell new shares they receive. Underwriters also have to sell shares of unsubscribed rights

before the agreed completion of an issue (the listing date).

Across the global rights issue markets in our sample, we consistently observe evidence in

support of our model. In particular, there is a significant decline in the market price and

a corresponding erosion of the issue discount, which represents the value of a right, over

the execution period of an issue. Issuing firms experience, on average, a negative abnormal

return of 4 percent, equivalent to a one-third reduction in rights value. We also find that the

decline largely stops and on average reverts to a positive return after the listing date. This

observed return pattern is highly perplexing, given that after the announcement date, the

execution and closing of a rights issue should be a non-information event, and hence, from

an efficient market perspective, one should not expect any price trend.

To explain the contributions of short selling activity to generating this price phenomenon,

we document the extent of short sales before, during and after the offering period of a rights

issue. Our data sources include daily stock lending data from the Markit (formerly Data

Explorer) Securities Finance database, as well as actual daily short activity data mandated

by regulators in several countries in the Asia Pacific region, namely Australia, Hong Kong,

2See Eckbo, Masulis, and Norli (2007) for a review

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South Korea and Taiwan. These are coincidentally jurisdictions where rights issues are also

highly prevalent. The Australian market, in particular, provides a clinical empirical setting

because short selling is not restricted by regulations to a subset of firms and is subject to a

comprehensive mandatory disclosure regime that encompasses short volume, short interests,

and borrowed shares (Comerton-Forde, Do, Gray, and Manton (2016a)), allowing us to

observe daily short activity for the entire market. Across all of these sources, we document

substantial increases (by a factor of around one half on average) in borrowed shares, short

trading volume, and accumulation of short interests after the ex-rights date. This heightened

short selling activity persists during the entire offering period, and reverses sharply at the

listing date, despite the fact that this date is not an information event.

The parallel patterns of negative returns and increased short sales during the execution

period of a rights issue are not coincidental. We find that an active stock lending market for

an issuing firm’s shares, measured during a normal period before the issue announcement,

significantly explains the cross-sectional variations in both the price decline and the increase

in short activity observed during the issue execution period. In addition, rights issues with

larger initial (ex-rights date) discounts and more generous ratios of new shares offered tend

to exhibit more negative returns and larger increases in short activity. These relationships

are consistent with the suggestion that short sales propagate when rights make up a large

proportion of firm value, creating in a significant scope for wealth transfers from uninformed

shareholders. The empirical results are by and large consistent with our hypotheses. Moti-

vated by the above evidence, we conduct other analyses that capture short sales constraints

more directly. In particular, we evaluate the efficacy of different types of short selling regula-

tions around the world in mitigating the downward price pressure in a rights issue. In doing

so, we closely follow Bris, Goetzmann, and Zhu (2007), Beber and Pagano (2013), Jain, Jain,

McInish, and McKenzie (2013), and Jones, Reed, and Waller (2016), who all utilize the rich

cross-country and time-series variations in market-level short selling regulations. The results

from this analysis show that certain restrictions, especially the up-tick rule and a naked short

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ban, lead to less negative returns during rights issues.

While the ability to measure daily short selling activity in many different ways is an

advantage of our study, it does not fully address endogeneity problems. Firms that can be

short sold are different to those that cannot in many unobservable ways. Using staggered

introductions of short regulations is also not perfect, as there may be underlying (unobserv-

able) reasons why some countries impose short restrictions in at specific times. To address

endogeneity, we utilize two different identification strategies that exploit discontinuities in

firm-level short selling constraints.

The first strategy utilizes plausibly exogenous variations in shares available for stock

lending activity in the Australian Securities Exchange (ASX) created by the assignment of

firms into the S&P ASX 300 index. As this is the broadest index still tracked by index funds

in Australia, the inclusion of a firm into the index results in a clear increase in index funds’

holdings, and consequently, lendable shares available for covered short sales. Our focus

on the Australian market is again driven by its comprehensive short disclosure practices.

Using market-wide daily short activity data, we can confirm that a discontinuity exists at

the S&P ASX 300 index cut-off using a regression discontinuity (RD) analysis on all listed

Australian firms. We then shift the focus back on the rights issue sample. Using the same

RD approach, we show that rights issues of firms ranked just inside of the S&P ASX 300

index cut-off experience a significantly larger price (and issue discount) decline during the

execution period than those conducted by firms ranked just outside of the cut-off. This

indicates that in a setting where other firm characteristics are (almost) held constant, short

sales constraints have the effect of curbing the downward price pressure in the execution

period of a rights issue.

Our second identification strategy takes advantage of a unique historical regulation im-

posed by the ASX in relation to naked short sales. Prior to 22 September 2008, naked

short selling was permitted only for shares classified by the ASX as “approved instruments”,

mainly based on whether a firm has a market value greater than A$100 million. We employ

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a fuzzy RD design to capture the impact of this regulation because the cut-off is not sharp

but subject to the ASX’s discretion. We find that around the discontinuity point, rights

issuers that are also in the “approved instruments” list tend to have more negative returns

during the execution period, than those that are not. This finding not only strengthens our

case for a causal relationship but also puts the spotlight on the possibility that rights issues

are highly susceptible to naked short selling strategies, as suggested by Eckbo and Masulis

(1992). However, we note that this implication extends to all short activity types because

the legality of naked short selling should also create a competitive pressure that reduces the

cost of covered short selling.

We also address the alternative possibility that the observed short selling activity in a

rights issue may not serve the purpose of concealing real information. In a broader trading

context, the consensus in the literature is that short sales are consistent with traders’ pri-

vate information (see Aitken, Frino, McCorry, and Swan (1998), Boehmer and Wu (2013),

Comerton-Forde, Jones, and Putnins (2016b), among others). Our setting is based on the is-

sue execution period, which occurs well after the announcement of a rights issue and therefore

should not, on average, produce new negative information. Nevertheless, this assumption

may not always hold, and thus we also explore whether the observed pattern of execution

period returns reflects informed trading. If this is the case, then one would not expect the

negative returns observed during rights offerings to reverse after the rights execution period.

However, we actually find evidence indicating such a reversal: there is a strong negative

correlation between execution-period returns and returns after the listing date. Following

the methodology of Henry and Koski (2010), we also find that an increase in shares borrowed

during the rights execution period predicts positive returns immediately after it. These re-

sults imply that, in the particular context of rights issues, short selling is on average not

informative.

A critical feature of rights issues that exacerbates the market distortion effects of short

sales raised by Gerard and Nanda (1993) is the mandatory inclusion of all existing sharehold-

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ers, whether informed or uninformed. The potential for wealth transfers is thus significant

in a rights issue because of the inherent frictions and information disadvantages of small

shareholders. To test this component of our hypothesis, we utilize the unique setting of

a type of rights issues called accelerated entitlement offers. These offers are conducted in

two separate tranches, one for institutions and one retail shareholders, thus allowing us to

measure precisely the participation of the latter group. We show that retail shareholders are

more sensitive to variations in rights value than institutions. Our estimates indicate that

holding the issue discount constant at -10%, institutions are likely to subscribe for 90% of

their rights, whereas the likely takeup rate for retail shareholders is only around 50%. Our

analysis further demonstrates that the increase in short activity is significantly correlated

with the aggregate wealth loss of retail shareholders.

Our paper is one of the first comprehensive cross-country studies of the rights offering

market.3 This allows us to bring new evidence from a large cross-section of firms in different

regulatory environments into the discussion on the benefits and costs of rights issues, which

started with the study by Smith (1977) on the disappearing rights phenomenon. Eckbo and

Masulis (1992) suggest that rights may be unpopular, and hence replaced by underwritten

public offers, in circumstances where the adverse selection costs of selling shares not taken

up by existing shareholders are high. This argument is supported by evidence from Oyvind,

Eckbo, and Michalsen (1997), Balachandran, Faff, and Theobald (2008), and Balachandran,

Faff, Theobald, and van Zijl (2012) who show that many initial decisions in a rights issue

is correlated with shareholder takeup. Holderness and Pontiff (2016) further suggest that

inadequate investor protection can also discourage shareholder takeup, leading to the demise

of rights issues in some markets. Our findings add yet another critical concern: faced with

the high costs of taking up new shares and inability to decipher information from short selling

activity, many uninformed (mainly retail) shareholders may suffer significant wealth losses.

The principle of offering new shares to all existing shareholders may actually handicap, rather

3Massa, Vermaelen, and Xu (2013) also examine rights issues across markets but they focus the importanceof mandatory rights trading requirements.

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than help, small shareholders.

The potential adverse consequences of short sales on rights issues are also raised briefly

in Jones et al. (2016) when they examine new regulations in Europe on the disclosure of

large short positions. They do not find that such disclosure has any impact on the chance

that a rights issue may fail. Our study does not examine large short positions but all types

of short activity in a market. We are also able to identify more precisely the conclusion of

a rights issue and thus can focus more closely on share price behavior around that time.

Similar to Jones et al. (2016), our results suggest that disclosure rules do not affect share

price behavior during a rights issue. However, unlike their study, we can precisely construct

the execution period of a rights issue and show that short activity can distort share returns

and that some regulations (other than disclosure rules) may curb this effect. To this end,

our analysis has implications for securities regulators by challenging the notion that rights

issues are, purely by the virtue of their design, a fair and equitable means of raising capital.

Instead, more stringent short sales regulations that apply specifically to rights issues may be

needed to safeguard the integrity of this equity raising method.

The structure of this paper is as follows. Section I presents a simple model to motivate our

empirical analysis. Section II describes the data and characteristics of the international rights

offering market. Section III discusses the share price and short activity patterns during the

issue execution period. Section IV discusses the relationship between short selling constraints

and price behavior. Section V examines whether the observed short activity is information

driven. Section VI provides an estimate of the wealth loss of retail shareholders. Section VII

concludes this paper.

I. A Simple Model

We motivate our empirical analysis with a simple model that illustrates the effect of short

activity during the rights execution period. Consider a listed firm that announces a 1-for-r

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renounceable rights issued to M investors who own the firm’s shares just before the ex-rights

date (date 0). After this date, the rights will be separated from the underlying shares. For

simplicity, we further assume that unsubscribed rights will be sold in an auction at the end

of the execution (offer) period. For individual rights holders, the value of the rights on date

t (t > 0) can be characterized by:

Rt = max[pt − s, 0] − ε,

where pt is share price on date t, s is the subscription price, and ε is non-zero fixed cost of

subscription, where ε ∼ U [0, p0 − s]. Here we assume that there is no further information

arrival in the rights execution period; hence, the upper bound of ε is given by dollar value

of the rights discount (p0 − s).

To demonstrate the possibility that market prices can be distorted during the rights

execution period, we introduce an informed trader (i) and an uninformed speculator (j),

who can both purchase/short shares in the stock market. They can also obtain shares from

the rights auction. The informed trader knows the true value of the stock v, but wishes to

increase their information rents (v − p) by scooping up unsubscribed rights from the rights

auction. We define θ(p) as the probability of rights holders relinquishing the rights due to

high subscription cost. Given i has to compete with j in the rights auction, the probability of

receiving rights of each party will be reduced by one-half, i.e. θ(p)2

. Below is the optimisation

problem of the informed trader i:

maxqi≤0

Πi(qi, qj) = (v − p)r θ(p)2︸ ︷︷ ︸

expected gain of

the rights

+ (p− s)r θ(p)2︸ ︷︷ ︸

expected cost of

the rights

− 12cq2i (1)

= (v − s)r θ(p)2

− 12cq2i

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s.t.

θ(p) ≡ Pr[max[p− s, 0] − ε < 0] = 1 − Pr[max[p− s, 0] − ε > 0] = 1 − p− s

p0 − s(2a)

θ(p) ≡

0

1 − p−sp0−s

1

for p < s

for s < p < p0

for p ≥ p0

(2b)

p ≡ p0 + λ(qi + qj) (2c)

qi ≤ 0 (2d)

qi is the quantity short by the informed trader i, for qi ≤ 0. λ is (linear) price impact

coefficient of the short trade. λ is the price impact coefficient (1/λ thus represents the level

of market liquidity of the shares).4 12cq2i is the convex cost of short selling under the cost

coefficient parameter c. It captures the cost associated with the binding of short selling

restrictions (e.g. the amount of shares that index funds are willing to lend). As price falls

due to shorting, discount falls, θ(p) increases and rights holders are more likely to relinquish

the rights.

The optimisation problem of the uninformed speculator j is similar to that of the informed

trader except that we replace v with p0, which is the price reflecting all publicly available

information on the ex-rights date.

In the absence of asymmetric information, if price is adjusted linearly in the spirit of

the Kyle (1985) framework, speculators will have no incentive to short because trades will

have no impact on prices. When there is private information, the informed trader has the

incentive to short. FOC of (1) yields:5

4For the sake of simplicity, we do not endogenize λ, which can be modelled under Kyle’s framework.5It can be shown that second order condition is satisfied.

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q∗i = −(v − s)r

2c

(λ

p0 − s

)(3)

Suppose, the speculator j does not short but compete to take up the rights forfeited by

investors, it can be shown that the corner solution qi = 0 is suboptimal as Πi(q∗i , 0) > Πi(0, 0).

Given q∗i , we can show that the speculator has no incentive to short given the cost of shorting.

FOC of the speculator’s optimization problem yields:

q∗j = −λr2c

(4)

Substituting q∗i and q∗j into the profit functions, we obtain:

Πj(q∗i , 0) > Πj(q

∗i , q

∗j ) (5)

Therefore, in equilibrium, the informed trader short q∗i while the speculator chooses not to

short but compete with the informed trader to scoop up the rights when the price falls.

Finally, it can be shown that:

∂q∗i∂c

> 0;∂q∗i∂s

> 0;∂q∗i∂λ

< 0;∂q∗i∂r

< 0 (6)

Comparative statics (6) suggest that the quantity short decreases (q∗i becomes less negative)

with the extent of short restrictions c and subscription price s. Since the short selling cost

function is convex, a higher c and a higher s imply that θ(p) decreases and the marginal

gain from shorting more declines. Further, q∗i becomes more negative when λ is high (the

informed trader needs to short more to exert enough price pressure) and when the rights

offer ratio is large (the informed trader can profit more from the strategy).

Since stock price change is given by the product of λ and q∗i , we establish following

empirical predictions in relation to short quantity and price change:

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Empirical Prediction 1 : The change in short activity (stock return) during the execution pe-

riod of a right issue is negatively (positively) related to the extent of short-selling restrictions

Empirical Prediction 2 : The change in short selling activity (stock return) during the ex-

ecution period of a right issue is positively (negatively) related to the discount p0 − s, the

offer ratio r, and the level of trading liquidity 1/λ.

II. Sample Construction

A. Rights and Entitlement Issues Data

We compile a novel and comprehensive dataset of rights offerings from around the world

using a number of sources. Our main source is underlying data on rights issue terms and

timetables from Exchange Data International (EDI), which are distributed by Bureau van

Dijk as a third party vendor via their Osiris module. EDI specializes in back office data for

financial institutions, including securities reference and corporate actions data. We consider

both rights and entitlement issues in their data, of which the latter is the term for issues

that generally do not provide a tradable security (although they can still be effectively

made renounceable in certain cases). For the remainder of the paper, we will refer to all

of these issues collectively as “rights issues” for convenience. To ensure that we have an

comprehensive international coverage of rights issues, we further supplement EDI data with

rights and entitlement issues from Bloomberg and Thomson Reuters SDC Platinum.

To clean the data, we exclude cases that involve issues of only options, dividend rein-

vestment plans, non-equity securities, and equity securities outside primary listing venues

(e.g. ADRs). We only consider issues from developed and emerging countries included in

the MSCI index in 2001 (Table I reports the full list of countries in our sample). In addition,

we conduct numerous data accuracy checks and cross-checks across our data sources with

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respect to key variables such as offer schedule and offer price. Finally, for issues with incom-

plete issue schedule information, we manually obtain such information from press releases

in Factiva or firm announcements from stock exchanges websites. Our final sample includes

11,918 rights issues by 7,479 firms in 43 countries during the period from January 2002 to

December 2014.

B. Sample Statistics

Figure 1 illustrates the aggregate proceeds from rights issues, in absolute terms and as a

percentage of all SEO types, that were conducted during the years 2002 to 2014. Contrary

to the notion that rights issues have “disappeared”, the figure shows they are still a very

important SEO mechanism. The value of gross proceeds from rights issues totaled over one

trillion US dollars. Outside the US, rights issues constitute about 20% to 40% of global

SEO proceeds. The relative usage of rights issues in fact increased from 2002 to 2008, and

only dropped after the 2008 Financial Crisis created a major disruption to the global capital

raising market.

[Insert Figure 1 Here]

With regards to individual countries, Table I illustrates the number of rights issues con-

ducted for each country, in each year, during our sample period. Rights issues have continued

to be the dominant method in Europe as well as Asia, with the top five countries conducting

50 percent of the total number of rights issues worldwide: Australia (20%), South Korea

(10%), Taiwan (8%), Hong Kong (7%) and Germany (6%). However, in some countries, it

is clear that rights issues have largely disappeared, as discussed in Eckbo et al. (2007). For

example, the US contributes less than 1% (102 offerings) of our sample, and the representa-

tions of Canada and Japan are similarly low relative to their market size. With this country

distribution, our sample is generally very comparable to that of the only other international

study of rights offerings, Massa et al. (2013).

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[Insert Table I here]

III. Event Study on Rights Execution Period

A. Stock Price Pattern

In this section, we examine abnormal returns over the rights execution period. The

diagram below documents the typical timeline of a rights issue and characterizes the event

windows relevant to our event studies. AN is the announcement date. EX is the ex-rights

date. Rights issues can be renounceable (transferable to third parties) or non-renounceable.

When rights are issued as a tradable security, TS and TE denote the trading start and end

dates. All rights issues involve a subscription period, as marked by the SS and SE dates.

The focal event date in our study is the listing date (LD), the day at which newly issued

shares are fully settled and available for trading, and as such, marks the end of the issue

execution period.

Table I also documents large differences across countries in terms of how rights issues are

conducted. However, an indistinguishable feature is the extended time frame to complete an

issue, reflecting the physical difficulties of communicating with and executing the decisions

of all shareholders. On average, it takes 9 trading days for an issue to go ex-rights, then 16

days for shareholders to complete their subscription process, and finally another 7 days for

newly subscribed shares to be made available for trading.

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It is important to note that our event study results presented below are not driven by

the mechanical adjustment to stock prices that occur in a rights issue. On the ex-rights

date, the price of an issuing firm drops because its shares are no longer traded cum-rights.

Without any new information, the ex-rights date price should adjust to reflect the dilution

that arises purely due to the pro rata issue of new shares at a discount.6 To incorporate this

adjustment, we use Datastream adjusted prices that already filter out the mechanical price

changes due to rights issue dilution. In addition, most of the return measures that we use

are relative to the price at the end of the EX+1 date, which should fully incorporate the

dilution adjustment.

Figure 2 graphs the buy-and-hold abnormal returns (BHAR) that ensue over the rights

offering period for the entire international sample. At this stage, abnormal returns are

computed simply by adjusting a firm’s returns against its corresponding country MSCI index.

The most notable feature of the graph is the substantial decline in BHARs between the ex-

rights date and the listing date. In terms of magnitude, BHARs decline by approximately five

folds during this period from about -1% to more than -5%. This is followed by a subsequent

increase in BHARs on average after the issue, which underlines a cessation in selling pressure.

[Insert Figure 2 here]

6The theoretical ex-rights price is given by: PEX = (NPC + PI)/(N + 1), where PC and PI are thecum-rights and issue price, and N is the number of existing shares that provide the subscription right forone new share.

16

To provide comparability with prior studies on rights issues, Table II reports abnormal

return statistics around the announcement date of an issue. In addition to raw and index

adjusted returns, our event study also compute abnormal returns using the market model.

We use the skewness-corrected bootstrapped t-test to for means and the Wilcoxon signed-

rank test for medians. In unreported robustness checks, we also use another market model

incorporating the Scholes and Williams (1977) betas to address non-synchronous trading

issues, and evaluate BHARs using the standardized cross-sectional test statistic proposed by

Boehmer, Masumeci, and Poulsen (1991) and the time-series standard deviation test statistic

proposed by Brown and Warner (1985). These other tests do not change our findings.

Similar to most prior studies, we find a negative and significant BHARs on the announce-

ment date and for the two-day window around it. The magnitude of the share price decline is

around 1.7%. However, after this initial price reaction, there is no further noticeable decline

until the ex-rights date.

Our main analysis considers the BHARs centred around the listing date. Table II docu-

ments the results and shows that the mean and median index-adjusted BHARs between the

day after the ex-rights date to the listing date are -4.4% and -5.0% respectively. The results

are the same for various windows leading to the listing date, from 10 days to up to 30 days

earlier. These windows encompass various rights issue processes, including trading of rights

and subscription of shares by shareholders.

The negative returns over the execution period is a peculiar result given that the schedule

of a rights issue is fixed and its conclusion, especially the listing date, should be fully expected

and should not encompass any new information. Given the non-information setting, the price

decline is consistent with heightened short selling during the execution period. If short selling

is not driven by information, then we should expect a reversal in abnormal returns following

the subscription end date. Two key observations are immediately noticeable about the post-

offer end windows. Median BHARs during these periods are either zero or very close to

zero, whereas mean BHARs are significantly positive, indicating that some firms experience

17

a large post-offer return reversal.

[Insert Table II here]

There are some potential alternative explanations for the above observed price decline.

First, issuing firms may time the release of negative news after the initial rights issue an-

nouncement, causing a price drop during the execution period. We argue that this possibility

is quite unlikely. Firms should avoid releasing negative news during rights issues since it could

have legal ramifications and would adversely affect the final level of subscription. Moreover,

it does not explain why the pattern of negative returns stops, or in some cases reverses,

around the end of the execution period.

Second, the price drop immediately after the ex-rights date could simply be the slow

information processing of the announcement date news. This is also quite implausible, as

we actually find that prices are stable, and in some cases rising, between the announcement

date and the ex-rights date. In unreported robustness checks, we split up the sample into

quintiles according to several common liquidity measures: trading turnover, bid-ask spread,

and the Amihud measure (see Fong, Holden, and Trzcinka (2017)). The negative abnormal

return pattern is consistently observed across these sub-samples.

Third, it is possible that the observed negative returns over rights subscription period

reflects a gradual revelation of shareholder takeup information, as suggested by Balachan-

dran et al. (2012). A low takeup rate may lead to an issue failure. We again consider this

explanation unlikely in view of the Eckbo and Masulis (1992) theory, which implies that the

expected shareholder takeup rate (generally known to the underwriter) can be inferred from

the flotation method (e.g., uninsured, standby and firm commitment) chosen the announce-

ment date of an issue. This means that any negative price reaction to the expected take-up

should be experienced on the announcement date rather than during the execution period.

In other words, there are no reasons for news about shareholder takeup to be consistently

negative given the initial expectation. Moreover, in the case of fully underwritten issues,

18

shareholder takeup is irrelevant to an issue’s success, but we still find (in an unreported test)

that price still declines significantly during the execution period of these issues.

Finally, to ensure that the results reported in the previous section are not driven by

a particular section of the sample, we also conduct the same event studies for different

industries, developed and emerging nations, size quintiles, and for rights with transferability

privileges. Our finding of a significant price decline during an issue’s subscription period

remains robust across these sub-samples.

B. Issue Price Discount

Given the above evidence, we next quantify the issue price discount, (the different between

the issue price and the prevailing market price) that the represents the value subscribing

rights holders are likely to receive as a compensation for their dilution at the conclusion of

a rights issue. It is important to emphasize the issue price is set before the execution period

(often before the announcement date) so the discount only varies because of movements in

market share prices. Although issuer firms can use issue discounts as a tool to pressure

shareholders to participate, the extent of such discounts are limited by the negative signals

that they send and the potential for wealth losses experienced by some shareholders if they

are unable to participate (Oyvind et al. (1997)). In our sample, the average discount that

emerges after the ex-rights date is about 18% (see Panel D of Table II). This average discount

is, however, not sustainable and declines significantly during the rights execution period, to

about 12% on the listing date.

C. Short Selling Activity during Issue Execution Period

In this analysis, we examine the level of short selling activity during a rights issue using

daily short data. As our rights issues are drawn from an international sample, we use

the Markit (Data Explorer) Securities Lending database to construct measures of short

selling activity across markets. The database contains information about aggregate securities

19

lending activity for individual firms in a market, as reported by institutions who lend to and

borrow stock from prime brokers. Our main measures constructed from these data capture

the number of shares currently on loan for each stock in a given day, scaled by either the

number of pre-issue shares or the number of shares made available for lending by (often

passive) institutional investors.

While the Markit database provides a board coverage of short-related data across different

countries, it is based on voluntary disclosure by institutions participated in the securities

lending market. In addition, not all stock borrowings are used for short-related activity and

the coverage of the Markit database tends to be biased towards large, liquid securities. To

address these concerns, we also use market-specific securities lending and actual short sales

data.

A market that offers a very high level of daily short-related activity disclosure is Australia,

where the reporting of not only securities lending activity but also short volume and short

interest is mandatory. For a number of reasons, empirical studies to date have typically

been constrained by the availability of a single short selling metric – typically either short

flow (volume) or short interest. Even in jurisdictions where both measures are available, the

frequency with which they are collected and reported is often mismatched. In this regard,

our paper benefits significantly from Australia’s daily reporting and disclosure regimes which

are arguably the most comprehensive and timely reporting of short sales data in the world

(Comerton-Forde et al. (2016a)).

Daily short transaction reporting has been mandated by Australian regulators since 2008.

Brokers are required to report the total number of shares short sold for each security to the

ASX by 9 A.M. the following trading day by the latest. The ASX publishes short sales volume

as a percentage of the total number of shares on issue for each security. For our analysis, we

compute short volume as a percentage of trading volume, as is done in many prior studies

(Diether, Lee, and Werner (2009), Boehmer, Huszar, and Jordan (2010), Engelberg, Reed,

and Ringgenberg (2012), Boehmer and Wu (2013), Comerton-Forde et al. (2016a)). From

20

2009, the ASX also started to report the number of shares being lent and borrowed on a

daily basis, and we use this to compute the same measures as computed for the Markit data

discussed above.

Daily short positions (short interests) reporting was implemented in June 2010 to aug-

ment daily short transactions reporting. Under this regime, short sellers must report their

short positions to the Australian Securities and Investment Commission (ASIC) within three

business days of the trade, and each day thereafter until the position is covered. ASIC aggre-

gates individual short positions by security and publicly discloses this information the day

following the trade settlement in their “short positions” report. Similar to Boehmer et al.

(2010) and Comerton-Forde et al. (2016a), we use the ratio of shares currently being in short

positions to all outstanding shares as our formal measure of short interest to capture the

‘stock’ aspect of short selling.

In addition to Australian short sales data, we also obtain similar data from Taiwan,

Hong Kong and South Korea. A general issue with these markets is that there can be

tighter restrictions on the number of shares and the list of companies that can be short sold,

compared to more liberal short sales regulations in Australia. However, the inclusion of these

markets strengthens the external validity of our analysis. Apart from the Markit database,

the other daily short activity data are obtained directly by scraping public data published

by from the relevant stock exchange / securities regulator websites, or from the Thomson

Reuters’ Tick History database.

Figures 3a-3d depict stock lending activity during the issue execution period. They show

a substantial increase in the number of shares on loan (either scaled by outstanding shares

or by lendable shares) during the execution period (from the ex-rights date to the listing

date) to the period containing 20 trading days before the ex date. These measures then

fall sharply at the conclusion of a rights issue, around its listing date. For example, the

percentage of lendable shares that are on loan increases from about 9% at day -20 before

the ex date to about a high of about 14% during the execution period before falling back to

21

about 8% after the listing date. The same pattern is observed for short volume and short

interest during Australian rights issues (Figures 4a-4b). Although the increase begins before

the ex-rights date, but increases significantly around this date. There is also a sharp and

immediate decrease in short volume and interest at the listing date, which suggests a rapid

unwinding of short selling activity once the execution period has ended. Figures 4c-4f depict

the same patterns for rights issues in Hong Kong, Taiwan and South Korea.

In an unreported analysis, we formally test the differences observed across our event

timeline for each of the above short activity measures. We compute the daily average statis-

tics for each of the measures for the following observation windows: (i) from 20 days before

the ex-rights date to the ex-rights date, (ii) from the ex-rights date to the listing date, and

(iii) from the listing date to 20 days after. For all of the measures, we obtain statistically

significant differences across when comparing (i) to (ii) and (ii) to (iii).

[Insert Figures 3 and 4 here]

IV. Short Constraints and Execution-Period Price Behavior

A. Pre-issue Short Selling Intensity

In this section, we test Empirical Prediction 1 in our model by examining the ability

of short selling activities to predict returns during the execution period of a rights issue.

The first adopt an approach analysis to that applied by Henry and Koski (2010) on US

SEOs (firm-commitment offers). We regress abnormal returns during the rights execution

period against several measures of short sales intensity in the 3-month pre-issue ‘estimation’

period that ends one month before an issue’s announcement date. The dependent variable

is BHAR(-20), the buy and hold abnormal return computed for the event window that

starts from either the ex-rights date plus one day or 20 working days before the listing date

(whichever is later) to the listing date. An important note to make is that Henry and Koski

22

(2010) examine announcement returns of SEOs. In contrast, our analysis focuses on the

non-information period post the announcement of rights issues.

Implicit in this analysis is the assumption that the level of pre-issue short selling is an

accurate reflection of a firm’s typical daily short selling activity. In this regard, the amount

of pre-issue short selling intensity reflects how easy/difficult it is to short sell the company on

a normal day-to-day basis. Companies with high levels of pre-issue short selling intensity are

assumed to be easier to short, whilst companies with very low levels of pre-issue short selling

intensity are considered to have high short constraints. Our expectation is that companies

that are easier to short are likely to experience negative returns during the rights execution

period, reflecting an increased downward pressure from in short selling activity.

We use the Markit stock lending data to construct short activity measures in order to

have a broad country representation. Although the Markit database does provide some

explicit short selling cost data (e.g. rebate rates), the coverage of such information is low

and varies significantly across markets. We settle with a with consistent coverage: Pre-issue

Onloan Shares represents the daily average number of shares currently borrowed or on loan

scaled by the number of pre-issue shares, computed over the period of 4 months to 1 month

prior to the announcement date of each rights issue.

In addition, we test Empirical Prediction 2 in our model by incorporating a number of

other important firm and issue characteristics that potentially explain buy-and-hold abnor-

mal returns during the execution period of a rights issue. They include other factors that

might play a role in incentivizing market participants to engage in short selling activity:

namely, liquidity, information transparency, and rights characteristics. All firm characteris-

tics are measured before an issue is known to the market, during the pre-event period from

4 months to one month before the announcement date.

To measure liquidity, we use Trading Turnover, is computed as unadjusted trading volume

scaled by the total number of outstanding shares. In unrobustness checks, we use other

liquidity measures suggested by Fong et al. (2017), including the Amihud measure, bid-

23

ask spread, and the number of zero trading days, but they do not change our results. To

incorporate the effect of information transparency on reducing short selling activity, we use

the following transparency proxies: Firm Size, Dividend Yield, and Analyst Coverage.

Two important issue characteristics considered in our model are Discount and Issue Ra-

tio. When the size of issue discount falls due to short selling pressure, the value of rights

decreases and the cost of letting rights expire reduces. When this happens, shareholder par-

ticipation declines, resulting in wealth transfers between participants and non-participants.

In this regard, traders wishing to accrue greater wealth transfers have an incentive to impose

negative price pressure to close this gap. Similarly, when the number of new shares issued to

old shares increases, the scope for capturing such wealth transfers through shorting shares

also increases.

Our tests consider a number of other factors outside our model that may potentially

influence the incentive to short. Drawing from Lucas and McDonald (1990), we consider the

possibility that companies with large price run-ups before their rights issues are more likely

to be overvalued and in these cases contrarian strategies, such as short selling, are more

appealing and less risky. We construct the variable Pre-issue Runup as the index-adjusted

return during the six-month period leading up to the announcement date. With respect to

the other issue characteristics serving as control variables, Renounceability is an indicator

variable for renounceable issues, Duration is the natural logarithm of the number of days

between the ex-rights date and the listing date.

Table III contains the regression results. Consistent with Empirical Prediction 1, we find

that Pre-issue Onloan Shares exhibits a negative and statistically significant correlation with

the dependent variable BHAR. Overall, given that the schedule of a rights issue after the

announcement date consists of largely non-information events, the evidence regarding short

volume highlights that the observed price pressure during the execution period is unlikely

to be from traders impounding information.

It is also unlikely that the price decline observed in the execution period of a rights

24

issue reflects slow diffusion of information. If this is the case, the liquidity measure (trading

turnover) should be positively related to BHAR(-20), but we find the opposite relationship

in our regression analysis. Share prices decline more during the execution period for firms

with greater trading liquidity.

In addition to examining abnormal returns over the execution period of a rights issue,

we also conduct the same regression analysis to explain the abnormal change in short selling

activity during the execution period. Motivated by the patterns depicted in Figures 3 and 4,

we compute the change in the shares on loan variable and the utilization variable from the

pre-offer period (4 months to 1 month before the ex date) to the execution period (from the

ex date to the listing date). The results are reported in the last three columns of Table III.

We find that the abnormal change in short selling activity (∆Onloan) during the execution

period can be explained by factors very similar to those that matter to abnormal returns.

Specifically, we find that the extent of shares on loan in the pre-offer period also predicts its

further increase during the execution period. Further, the level of issue price discount just

after the ex date the pre-issue level of trading liquidity significantly predict an increase in

execution-period short activity. These results are consistent with both Empirical Predictions

1 and 2.

[Insert Table III here]

B. Country-level Short Selling Regulations

Our model predicts that rising short-selling cost reduces short selling activity during the

rights execution period. In this section, we attempt to use short selling constraints directly

through changes in regulatory restrictions as a proxy for short selling cost. Following Bris

et al. (2007), Beber and Pagano (2013), and Jain et al. (2013), we manually construct a

set of measures that reflect typical short selling restrictions employed by regulators across

countries: (i) whether a short sale is only permitted on an up tick (Up-tick Rule), (ii)

25

whether traders are allowed to sell stocks without owning or borrowing them (Naked Short

Ban), (iii) whether a country strengthens the disclosure regime governing short sales during

the sample period (Short Disclosure), and (iv) whether short sales of financial firms are

banned (Financial Firm Short Ban). Each of these variables indicate whether a particular

type of short regulations is in place in the issuer’s primary market in the same year as the

rights issue.

The results are reported in Table IV. Consistent with Hypothesis 4, we find Up-tick

Rule is positive and significant in explaining BHAR(-20). This result is also consistent

with prior evidence (such as Diether et al. (2009), which indicates that the up-tick rule is

a binding short selling constraint. Naked Short Ban is also significant when all restrictions

are considered together in one regression. However, similar to the results from Jones et al.

(2016) on variations in European short transparency rules, we do not find that stricter

disclosure requirements help limit the extent of negative execution-period abnormal returns.

Overall, our evidence suggests that stricter short selling regulations may be important in the

context of rights issues, but also questions the effectiveness of the FSA’s action to introduce

mandatory large short position disclosure for rights issues.

[Insert Table IV here]

C. Identification Strategy - RDD using the ASX S&P 300 Index

The previous analyses have documented a strong correlation between proxies for short

selling constraints and execution-period abnormal returns, but have not addressed potential

endogeneity in this relationship. Firms that are difficult to short may be different to those

that have low short selling costs in many unobservable ways, especially with respect to the

whether existing shareholders are willing to lend their shares.

To address endogeneity, we utilize two different identification strategies that exploit dis-

continuities in firm-level short selling activity in Australia. The first is related to a large

26

shift in shares available for stock lending activity created by the assignment of firms into the

S&P ASX 300 index. As this is the broadest index still tracked by index funds in Australia,

the inclusion of a firm into the index results in a clear increase in index funds’ holdings,

and consequently, shares available for stock lending activity. We argue that this creates a

discontinuity in short constraints that can explain abnormal returns observed during the

execution period of rights issues.

There is a growing literature on the use of discontinuity in passive funds’ holdings created

by assignment into the Russell 1000/2000 index. Our setting has two additional advantages.

First, unlike the US market, the S&P ASX index series dominate the market, creating a very

sharp discontinuity around the S&P ASX 300 index 7. Second, with the Russell 1000/2000

index, econometricians cannot directly observe the assignment variable (free-float market

capitalization at the reconstitution date), and have to replicate this with a potentially biased

ranking. With the S&P ASX 300 index setting, we have a direct proxy for the actual ranking

variable, free-float market capitalization, as free-float shares at the index reconstitution point

can be computed with available ownership information.

We estimate the local average treatment effect around the S&P ASX 300 index cut-off

using a regression discontinuity analysis. This requires us to replicate the S&P ASX 300

construction for a sample of eligible listed Australian firms. The main eligibility criteria are

related to liquidity of a firm relative to the average market liquidity (computed using firms

in the S&P All Ordinaries index) and we follow exactly the methodology of S&P to compute

their liquidity measure for all listed Australian firms, and eliminate those that do not meet

the minimum liquidity criteria. The measure that S&P uses to rank firms to determine

whether they are included in the index is free-float market capitalization (the largest firm

receives the 1st rank). We again follow definitions provided by S&P to obtain blockholdings

by strategic entities (ownership stakes of 5% or greater excluding those held by investment

funds) that S&P counts against a firm’s free float shares. These detailed ownership structure

7The next available index is the S&P ASX All Ordinaries. It has around 500 firms, which makes itdifficult for index funds to replicate. No index funds in Australia track the S&P ASX All Ordinaries

27

data are obtained from the Securities Industry Research Centre of Asia-Pacific (SIRCA) and

manually from annual reports for the financial year end closest to an index rebalancing date.

To determine whether a firm is included in the S&P ASX 300, S&P uses two separate

decisions rules to maintain index continuity and avoid excessive rebalancing costs. If a

firm is previously not included in the index, it will be included in the index if its free-float

market capitalization rank in the current rebalancing date falls below 275. However, if a

firm is already a member of the index, it will only be excluded if its current free-float market

capitalization rank exceeds 325. The standard procedure employed in RD designs dealing

with multiple thresholds is to create a centered forcing variable by adjusting it against the

corresponding threshold applied to each subsample, so that they can be pooled together. We

adopt the same approach here by subtracting 275 (325) from a firm’s size rank if it is not

yet (or already) an index member.

An important issue when implementing a regression discontinuity design is the choice of

bandwidth around the cutoff point. A large bandwidth reduces the variance of the estimates

since more observations are used in the estimation. However, a large bandwidth also increases

the potential biases of the estimation utilizes more observations far away from the cutoff

point. In this analysis, we employ the methodology of Calonico, Cattaneo, and Titiunik

(2014) to estimate the bandwidth. The authors propose confidence intervals for regression

discontinuity treatment effects that offer robustness to “large” bandwidths. Their estimation

procedure also allows for the computation of clustered standard errors and the inclusion of

additional covariates. In the specifications with additional covariates, we include the same

control variables as those used in the OLS regressions reported in Table III. The main RD

regression specification can be expressed as follows:

BHARi = α1 + α0ASX300+i + α1f(CMRi) + α1ASX300+

i × f(CMRi) + εi. (7)

where, ASX300+i is an indicator variable that equals to one if firm i is ranked outside of

28

the S&PASX 300, and zero otherwise. CMRi is the forcing variable, which is the free-float

market capitalization rank of firm i (centered around the corresponding cut-off, depending

on whether firm i is already an index member). f(CMR) is the function of the relationship

between the centered rank of firm i and the return measure. Our RD models are estimated

using local linear or quartic polynomial regression.

The results are reported in Table V and in Figure 5. Before we estimate the main RD

regression, we confirm that there is a clear discontinuity around the S&P ASX 300 index

cut-off with respect to short selling activities of all listed firms in the ASX that meet the

S&P ASX 300 index’s eligibility criteria. This result is shown in the first 2 columns of Table

6 and the corresponding RDD graphs in Figures 5a and 5b. Firms just inside the cut-off

for index inclusion have greater more lendable shares and shares on loan as a proportion of

outstanding shares. This result is robust to alternative function forms (linear or quartic)

that we impose on the RD model.

We then focus on the rights issue sample. Using the same RD approach, we show in Table

V and in Figures 5c and 5d that rights issues of firms ranked just outside of the S&P ASX

300 index cut-off have less lendable shares and shares on loan as a proportion of outstanding

shares. Next, we examine the main RD specification with BHARs as the dependent variable

and find that firms ranked just outside the index cut-off experience a significantly smaller

price decline during the execution period than rights issues of firms ranked just inside of the

cut-off. This indicates that in a setting where other firm characteristics are (almost) held

constant, short sales constraints have the effect of curbing the downward price pressure in a

rights issue. In addition to BHARs, we also examine the change in issue price discount from

the day after the ex date to the listing date as an alternative dependent variable. Because

the discount variable is constructed as a negative difference (i.e., a 20% discount = -0.2),

we find that the coefficient for the ASX300+i indicator variable is negative. Consistent with

our expectation, this indicates that firms ranked just outside the index cutoff experiences a

smaller reduction in discount than those ranked just inside.

29

We conduct a number of standard checks on the above RD results. First, we check if there

is a smooth variation around the cut-off for other covariates. The most important covariate

is liquidity. In Figures 6a to 6d show that there is no discontinuity in different liquidity

measures around the cut-off. Second, we do not find any evidence that firms manipulate

their S&P ASX 300 index rankings around the cut-off. This is shown Figure 6e, which is

based on the McCrary (2008) test for potential manipulation of the running variable. Third,

we vary the cut-off by 25 and by 50 ranks as placebo tests (not reported), and find that the

discontinuity no longer exists.

[Insert Table V and 6 here]

D. Identification Strategy - RDD using a Naked Short Rule

Our second identification strategy exploits a unique historical ASX regulation on naked

short selling activity. Prior to 22 September 2008, naked short selling (NSS) was allowed

for companies that had a market value (MV) of greater than A$100 million. For companies

that were marginally on the other side of this discontinuity point (i.e., MV just lower than

A$100 million), their underlying characteristics would be very similar to the companies that

just made the cut off, but these companies are likely to have higher short selling barriers.

In this regards, the difference in returns over the rights subscription period would be driven

primarily by having different short selling constraints. From 22 September 2008, naked short

selling was completed banned by the ASX. This discontinuity allows us to employ a fuzzy

regression discontinuity design to estimate the effects of naked short selling (NSS) bans on

rights offerings. The same strategy is also used by Lecce, Lepone, McKenzie, and Segara

(2012), but in another empirical context.

We use a fuzzy RDD rather than a sharp RDD in part because the discontinuity point

is not sharp. The A$100 million MV cut-off was not the only threshold that a company was

required to pass to be placed onto the approved NSS list. ASX market rules also required

30

securities to have over 50 million shares of issue, and possess ‘sufficient liquidity’. The ASX

could exercise discretion regarding the sufficient liquidity criteria (Lecce et al. (2012)). In this

regard, the assignment to the treatment group (i.e. being assigned the status of ‘approved’

short instrument) could be ambiguous. But the probability of this assignment significantly

increases as a firm crosses the cut-off.

A fuzzy RDD is estimated over two stages. The first-stage is modeled as follows:

NSSi = β0 + β1MVC+i + β2f1(MVi) + β3MVC+

i f1(MVi) + εi, (8)

where NSSi is an indicator variable that equals to one if firm i is in the ASX’s approved

NSS list, and zero otherwise. MVi is logarithmic transformation of the average market

capitalization of firm i over one month prior to its ex-rights date. MVC+i is an indicator

variable that equals to one if MVi is greater than the cutoff value of A$100 million, and zero

otherwise. f1(MVi) is the function of the relationship between the market value of firm i and

the likelihood of receiving treatment (i.e., being assigned the status of an approved short sales

instrument by the ASX). From this stage we are able to assess whether the A$100 million

MV threshold is a relevant instrumental variable (IV) for naked short selling restrictions.

We input the predicted value of the mediator, NSSi, in the second-stage below:

BHARi = γ0 + γ1NSSi + γ2f2(MVi) + γ3NSSif2(MVi) + µi. (9)

Table VI documents the results of the fuzzy RDD with estimations based on local linear

regression and local quartic polynomial regression. One practical estimation issue that we

face is that our sample is dominated by a large number of small firms on the left side of the

A$100 million cut-off. This has the effect of increasing the variance of the estimates. Thus,

in some alternative specifications, we remove small firms with market value of less than A$10

million (and A$50 million) from the sample. The first-stage results confirm that the A$100

million market capitalization threshold is a relevant instrumental variable for naked short

31

selling bans as evidenced by the positive and statistically significant (5% level) coefficient

on the MVC+i indicator variable. Examining the second-stage regression, the coefficient of

NSSi is negative and significant (when using the 4th order polynomial regression). When

we exclude small firms, the coefficient estimates of NSSi are consistently significant. The

results imply that when firms are approved for naked short sell, they experience more negative

BHARs during the rights execution period.

As an alternative dependent variable, we use the change in issue price discount from the

ex-rights date to the listing date. Consistent with our expectation, the coefficient of NSSi

is positive, indicating that without a naked short selling restriction, an issuing firm is more

likely to experience a reduction inn issue price discount (expressed in negative terms), and

correspondingly, a lower rights value at the conclusion the issue.

[Insert Table VI here]

We conduct several unreported robustness tests. We impose the ASX’s additional criteria

that companies must have 50 million of shares in free float to be an eligible member of

the approved naked short sales list. Enforcing this constraint does not change our results.

Because naked short selling was permanently banned on all ASX listed stocks on the 22

September 2008, we conduct a falsification test by widening the time frame of our analysis

to consider rights issues in the period post 22 September 2008. Because the NSS approved

list was abolished during this period, we use a sharp RDD design using the $100 million MV

cut-off as a deterministic discontinuity point. Panel A of Table 10 contains the results, and

indeed the coefficient is insignificant, which is consistent with our expectations. In another

falsification test, we go back to the pre 22 September 2008 sample and consider different MV

thresholds that act as placebos for the A$100 million MV cut-off. We specifically examine the

cut-offs: A$70 million, A$90 million, A$110 million, and A$130 million, to check whether

the difference in BHARs is driven by the actual A$100 million threshold. In all of these

specification, the coefficients of NSSi are insignificant.

32

Overall, the evidence provided in this section strongly supports Empirical Prediction 1

in our model: short selling induced price pressure can be alleviated with greater short selling

restrictions. Importantly, whilst we focus on naked short selling restriction in the second

RDD analysis, the ability to naked short sell can also reduce the costs of covered short

selling strategies through competition, that is, short sellers have different ways to execute

their strategies. In addition, it is possible that naked short selling could be a favored strategy

during rights issues. This was raised by Eckbo and Masulis (1992) who suggest that short

sellers need not cover their positions through borrowing if they can use the shares from the

offering instead.

V. Informativeness of Short Activity during Execution Period

The previous analysis establishes a plausibly causal relationship between short selling

constraints and price behavior during a rights issue. However, at this stage, it remains

unclear why issuing firms experience short selling pressure during the execution period.

Most studies on short selling contend that short sales on average and in normal trading are

information-driven. However, the execution period of a rights issue is largely void of new

information. Even if rights-issue short activity is informative, it is unclear why the execution

period is on average laden with negative news.

In this analysis, we attempt to characterize the type of price pressure exhibited during

rights offering, specifically whether it is temporary or permanent. In order for the temporary

price pressure explanation to be plausible, there must exhibit an inverse relationship between

pre-offer returns and post-offer returns. If no reversal is found, then this would resonate with

information based hypotheses that predict permanent price drops with no reversal.

Recall that the evidence from Table II is suggestive of a temporary price pressure. We find

that the average BHARs after the listing date are positive and significant. In this section, we

test whether returns before and after the conclusion of a rights issue are negatively correlated.

We estimate a regression model using three alternative dependent variables BHAR (+10),

33

BHAR (+20) and BHAR (+30), which correspond to the buy-and-hold abnormal returns

in the immediate 10, 20 and 30 trading days after the listing date respectively. The key

independent variable BHAR (-20). In conducting this analysis, we follow a number of studies

that examine the relationship between post-offer date returns and pre-offer date returns of

US SEOs (see Korajczyk, Lucas, and McDonald (1991) and Corwin (2003)). In addition,

we also regress the three alternative post-offer BHARs measures on the change in shares on

loan from before to during the execution period, following a similar test in Henry and Koski

(2010).

If the price pressure is temporary, then we expect that companies with negative returns

during the offering will outperform companies with positive returns during the offering, that

is, there is a negative correlation between BHARs during the execution period and BHARs

after the offering. Similarly, we expect that a temporary increase in short activity during the

execution period is not informative and may actually predict a return reversal (to positive).

The results are reported in Table VII, and are consistent with our expectations.

Overall, our evidence with respect to companies experiencing opposite return patterns

during and after their rights offering period is consistent with the theoretical prediction of

Gerard and Nanda (1993) within an SEO context. It is, however, important to note that

this is not definitive evidence of manipulative short selling activity as suggested by Gerard

and Nanda (1993) it merely indicates that short sales during rights offerings are unlikely to

be informed.

[Insert Table VII here]

VI. Short Activity and Retail Shareholders

The evidence in the previous section of a negative relationship between pre- and post-

issue-completion returns, combined with past findings on low shareholder takeup, points to

the possibility that there are potential wealth losses for some existing shareholders. We argue

34

that such losses are concentrated among a sizable proportion of shareholders that personally

face significant frictions in exercising their rights, including information disadvantages and

high transaction costs associated with new share subscription.

To test this argument, we focus on a special type of rights issues in which such share-

holders can be clearly identified. Specifically, we examine accelerated renounceable (or non-

renounceable) entitlement offers (AREOs and ANREOs) in Australia. These issues are

conducted in two tranches: an accelerated offer conducted over 1-2 days for institutional

shareholders and another offer conducted over an extended period for retail shareholders,

similar to a normal rights issue. The key advantage of this setting that suits our empirical

design objective is the ability to clearly identify the proportion of retail shareholders in an

issuing firm, 8 and to separately measure the takeup rate of institutions and retail sharehold-

ers. We argue that retail shareholders face significantly higher share subscription costs and

are less informed than institutional shareholders. Our AREOs and ANREOs sample consists

of 212 transactions. We obtain takeup rates separately for institutional shareholders (in the

institutional tranche) and retail shareholders (in the retail tranche) are manually obtained

from company announcements to the ASX.

Using this special type of rights issues, we compare the propensity to subscribe for new

shares conditional on their rights value between retail and institutional shareholders. First,

we estimate a fractional probit regression of retail shareholder takeup on issue price discount

(measured at the ex-rights date, the subscription end date, or the listing date). The marginal

effects inferred from the estimates are reported in Table VIII. The relationship is both

statistically and economically significant. At the mean, a one percentage point decline in

discount results in about 1% fewer retail shares being taken up. We then estimate the

same regression for institutional takeup using the ex-rights date discount as the dependent

variable.9 The predictive margin plots for the regressions on retail takeup and institutional

8Institutional investors are commonly defined in AREOs and ANREOs as “sophisticated investors” and“professional investors” under the classification of s.708 of the Corporations Act 20001 in Australia, whichdetails the size and professional qualification requirements of these investors.

9The institutional tranche of an accelerated entitlement offer ends the day before the ex-rights date.

35

takeup are given in Figures 7a and 7b. They show that, for the same rights value, retail

shareholders are much less likely to take up their shares. At an issue discount of -10%, only

about 50% of retail shares are takeup up, vis-a-vis 90% for shares in the institutional tranche.

We next compute three proxies for wealth losses experienced by retail shareholders if

they fail to take up their shares. When this happens in an AREO (which is equivalent to

a renounceable rights issue), the rights are sold on behalf shareholders by the underwriter

to institutions in a “bookbuild” transaction, often at a heavily discounted price or even the

issue price. For an ANREO (non-renounceable), non-subscribing shareholders lose the entire

value of their entitlements. Our wealth loss measures are computed as the hypothetical value

of all non-subscribing shareholders’ entitlements that would materialize if they had instead

subscribed for the new shares and held them until 10, 20, or 30 days after the listing date.

These are scaled by the firm’s market capitalizations at the corresponding days, as shown in

the following equation:

WL(+t) =

SR(1 − TR)(

(PBB − P+t)/P+t

)for renounceable issues

SR(1 − TR)(

(PI − P+t)/P+t

)for non-renounceable issues

(10)

where SR is the proportion of new shares offered to retail shareholders, TR retail shareholder

takeup rate, PBB is the price obtained from a bookbuild used to sell shares from unsubscribed

right in an AREO, PI is the issue price, and P+t is price on day +t after the listing date.

In the last 4 columns of Table VIII, we show that the increase in short selling activity

during the execution period of an accelerated entitlement offer significantly explains the low

level of retail shareholder takeup. Similarly, there is a significant relationship between the

short activity measure and the wealth loss measures, especially at the longer windows, which

potentially incorporate more price reversals. Overall, these results suggest that short activity

can generate significant wealth transfers away from retail shareholders.

36

VII. Conclusion

This paper poses the question, “does short selling increase during rights issues and make

the process less attractive for existing shareholders?” Whilst rights issues are in principal

supposed to provide a fair and equitable means of raising capital, they force all existing share-

holders (informed of uninformed) to make a decision, rather than delegating the power to

raise capital at an appropriate price to an agent (underwriter) representing all shareholders.

Because of this, there are opportunities for informed traders to exploit the information dis-

advantages and (subscription) transaction costs of certain existing shareholders (e.g., small

retail shareholders).

Our study documents a puzzling pattern that during the execution period of a rights

issue, the issuing firm experiences persistent decline in price and issue discount that only

ends at the conclusion of the issue, the listing date of new shares. The significance of this

finding is underpinned by the fact that the schedule of a rights issue after its announcement

should be relatively void of new information, and from an efficient market perspective, no

persistent price discovery in one direction should occur during this period. Given the strong

correlation between negative returns and low shareholder take-up Balachandran et al. (2012),

the finding elucidates the phenomenon of low shareholder participation in rights issues that

has been highlighted by Holderness and Pontiff (2016) and Rantapuska and Knupfer (2008)

Using daily short activity data, we also document significant increases in shares being

borrowed, short volume and short interest during rights issues and a subsequent rapid un-

winding of short selling activity immediately after the issue ends. Given that short selling

naturally induces negative price pressure this result is consistent with the possibility that

the observed decline in prices is driven by abnormal short selling during rights issues. We

show that short selling intensity is correlated with both returns during and after rights is-

sues. We also show that this is more than mere correlation. Using two RD designs that

exploit discontinuities in short selling activity across firms in Australia, we are able to make

a causal inference that rights issuing companies with less binding short selling constraints

37

tend to have more negative returns during the subscription period. More broadly, we find

that regulations play an important role in mitigating the price decline during rights issues.

However, some types of regulations, e.g. the up-tickk rule, are more effective than others.

Finally, we present evidence suggesting that rights-issue short selling activity appears to

create market distortions that particularly affect retail shareholders.

Despite the conventional wisdom that rights issues are a fair and equitable means of

raising capital, some rights-issue-related market trading activity can indeed be “prejudicial

to the interests of small investors”, as noted by the FSA. Our results highlight that short

selling activity, while important to the general market trading, may lead to adverse outcomes

for rights holders, especially if they are uninformed and are forced to make a subscription

decision. To this end, our analysis highlights the need for regulators around the world

to follow the FSA’s footsteps and re-examine their regulations of rights offerings taking

into consideration the potential value of strengthening short sales restrictions around this

important form of capital raising transactions.

38

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42

010

2030

4050

%

050

100

150

200

250

USD

billi

on

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Aggregate offer sizeRights offer size as % of all SEOs (ex. US)

Figure 1. Distribution of aggregate offer size of rights issues over sample period

-6-4

-20

%

-8 -4 AD +4 . -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12 +16 +20Day relative to announcement date (AD), ex date (EX), subscription end date (SE), or listing date (LD)

Figure 2. Market index adjusted returns during rights offer period

43

.6.7

.8.9

1%

-20 -16 -12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 3a. Shares on loan scaled by pre-issue shares (World)

810

1214

%

-20 -16 -12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 3b. Shares on loan scaled by lendable shares (World)

.15

.2.2

5.3

%

-20 -16 -12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 3c. Shares on loan scaled by outstanding shares (Australia)

67

89

10%

-20 -16 -12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 3d. Shares on loan scaled by lendable shares (Australia)

44

.1.1

5.2

.25

%

-20-16-12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 4a. Short interests scaled by outstanding shares (Australia)

1.5

22.

53

3.5

%

-20-16-12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 4b. Short volume scaled by trading volume(Australia)

01

23

%

-20-16-12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 4c. Short interests scaled by max shortable shares (Taiwan)

02

46

810

%

-20-16-12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 4d. Short volume scaled by trading volume (Taiwan)

.51

1.5

22.

5%

-20-16-12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 4e. Short volume scaled by trading volume (Hong Kong)

.51

1.5

22.

53

%

-20-16-12 -8 -4 EX +4 +8 . -8 -4 SE +4 . -4 LD +4 +8 +12+16+20Day relative to ex date (EX), subscription end date (SE), or listing date (LD)

Figure 4f. Short volume scaled by trading volume (South Korea)

45

0.0

5.1

.15

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 5a. Discontinuity of % lendable shares at ASX300 cutoff - all firms

01

23

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 5b. Discontinuity of % shares on loan at ASX300 cutoff - all firms

0.0

5.1

.15

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 5c. Discontinuity of % lendable shares at ASX300 cutoff - rights issues

0.5

11.

52

2.5

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 5d. Discontinuity of % shares on loan at ASX300 cutoff - rights issues

-15

-10

-50

510

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 5e. Discontinuity of BHAR(-20) at ASX300 cutoff - rights issues

-.05

0.0

5.1

.15

.2%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 5f. Discontinuity of ∆Discount at ASX300 cutoff - rights issues

46

0.2

.4.6

.81

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 6a. Trading turnover near ASX300 cutoff - all firms

0.2

.4.6

.81

%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 6b. Trading turnover near ASX300 cutoff - rights issues

02

46

810

12%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 6c. Bid-ask spreads near ASX300 cutoff - rights issues

0.0

01.0

02.0

03.0

04%

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 6d. Amihud measure near ASX300 cutoff - rights issues

0.0

01.0

02.0

03

-400 -300 -200 -100 0 100 200 300 400 500Centered size rank

Figure 6e. Density plot based on the McCrary (2008) test

47

0.2

.4.6

.81

Cond

ition

al m

ean

of R

etai

l Tak

eup

-.8 -.6 -.4 -.2 0 .2 .4Issue price discount at listing date

Figure 7a. Predictive margin plot for Retail Takeup with confidence intervals

0.2

.4.6

.81

Cond

ition

al m

ean

of In

sto

Take

up

-.8 -.6 -.4 -.2 0 .2 .4Issue price discount at ex-rights date

Figure 7b. Predictive margin plot for Insto Takeup with confidence intervals

48

Table I. Sample coverage across countriesThe sample include rights issues from 2002 to 2014. AN, EX and LD denote the announcement date,subscription period end date, and listing date, respectively.

No. offirms

No. ofissues

Aggregate issuesize (US$ mil)

Median issue schedule (in trading days)

AN to EX EX to SE SE to LD

Argentina 14 17 1418.46 4 10 5Australia 1281 2410 84 538.05 3 18 7Austria 39 86 27 803.06 1 10 6Belgium 33 41 32 567.76 2 10 5Brazil 150 330 109 450.60 2 21 22Canada 123 135 7642.39 7 20 4Chile 57 102 21 452.74 4 24 9China 88 94 29 763.42 6 9 9Denmark 48 67 11 271.29 5 12 7Egypt 81 110 6535.65 11 25 40Finland 35 52 8140.26 2 16 7France 221 323 115 147.60 2 9 11Germany 385 678 49 840.83 2 10 5Greece 71 105 45 910.99 3 14 11Hong Kong 452 769 59 858.99 19 16 7India 205 228 20 330.33 6 32 13Indonesia 156 238 31 891.93 28 8 4Ireland 12 16 5530.47 1 15 5Israel 129 203 3697.48 5 9 4Italy 142 221 107 272.90 3 14 6Japan 15 18 426.08 18 35 12Malaysia 293 349 21 721.95 10 15 11Mexico 48 80 7886.78 7 9 1Netherlands 26 28 22 973.91 2 9 5New Zealand 63 98 2172.87 11 19 5Norway 114 180 15 463.76 2 17 6Pakistan 102 137 1777.74 17 38 16Peru 37 57 1713.71 10 22 7Philippines 45 63 5958.28 12 17 9Poland 60 79 6164.34 29 16 19Portugal 16 31 16 287.79 4 13 9Singapore 237 339 22 387.06 25 15 7South Africa 93 122 14 822.98 17 19 2South Korea 706 1111 33 565.03 13 21 13Spain 41 64 52 893.09 3 10 9Sweden 267 574 18 850.03 15 15 5Switzerland 42 64 14 799.82 3 6 5Taiwan 648 989 25 407.72 19 15 9Thailand 207 303 19 802.99 28 19 10Turkey 156 302 14 774.69 15 10 15United Kingdom 450 600 236 021.20 1 15 5United States 91 105 8492.64 9 21 4All countries 7479 11 918 1 134 429.70 9 16 7

49

Table

II.

Sto

ckre

turn

san

dis

sue

dis

counts

duri

ng

ari

ghts

issu

eT

he

sam

ple

per

iod

incl

ud

esri

ghts

issu

esw

ith

the

ex-r

ights

date

bet

wee

nfr

om

2002

to2014.

Ina

rights

issu

e,th

eev

ent

date

sare

the

an

nou

nce

men

td

ate

(AN

),th

eex

-rig

hts

dat

e(E

X),

the

sub

scri

pti

on

per

iod

end

date

(SE

),an

dth

eli

stin

gd

ate

(LD

).E

vent

win

dow

s(e

.g.

AN

-2to

AN

+2)

are

exp

ress

edin

nu

mb

erof

trad

ing

day

sre

lati

veto

ap

art

icu

lar

even

td

ate

.B

HA

R(M

ark

etM

od

el)

isb

uy

an

dh

old

ab

norm

al

retu

rnco

mp

ute

dfo

ran

even

tw

ind

ow,

usi

ng

the

corr

esp

ond

ing

esti

mate

dre

turn

from

the

mark

etm

od

elas

the

ben

chm

ark

.B

HA

R(M

ark

et-i

nd

exA

dju

sted

)is

bu

yan

dh

old

abn

orm

alre

turn

com

pu

ted

for

anev

ent

win

dow

,usi

ng

the

corr

esp

on

din

gM

SC

Iin

dex

retu

rnas

the

ben

chm

ark

.D

isco

unt

isco

mp

ute

das

issu

ep

rice

div

ided

by

the

mar

ket

pri

ceat

the

rele

vant

even

tdate

min

us

on

e.B

oots

trap

ped

skew

nes

s-ad

just

edt-

test

isu

sed

tote

stth

esi

gn

ifica

nce

of

mea

nst

atis

tics

and

the

Wil

coxon

sign

ran

kte

stis

use

dfo

rm

edia

nst

ati

stic

s.

Raw

retu

rns

BH

AR

(Mark

etm

od

el)

BH

AR

(In

dex

ad

just

ed)

Mea

nM

edia

nM

ean

Med

ian

Mea

nM

edia

n

Pan

elA

:Ret

urn

sar

oun

dan

nou

nce

men

td

ate

AN

−1.1

14∗∗

∗0.0

00∗∗

∗−

1.067∗∗

∗−

0.165∗∗

∗−

1.152∗∗

∗−

0.423∗∗

∗

AN

-1to

AN

+1

−1.6

72∗∗

∗−

0.542∗∗

∗−

1.553∗∗

∗−

0.934∗∗

∗−

1.810∗∗

∗−

1.295∗∗

∗

AN

-2to

AN

+2

−1.

350∗∗

∗−

0.839∗∗

∗−

1.132∗∗

∗−

1.226∗∗

∗−

1.544∗∗

∗−

1.6

41∗∗

∗

AN

-2to

EX

0.530∗∗

−0.

967∗∗

∗0.

995∗∗

∗−

0.847∗∗

∗1.

692∗∗

∗−

0.6

28∗∗

∗

Pan

elB

:R

etu

rns

du

rin

gth

eis

sue

exec

uti

onp

erio

dE

X+

1to

SE

−2.

373∗∗

∗−

2.771∗∗

∗−

1.640∗∗

∗−

2.670∗∗

∗−

2.8

53∗∗

∗−

3.4

58∗∗

∗

SE

toL

D−

0.884∗∗

∗−

0.168∗∗

∗−

0.737∗∗

∗−

0.887∗∗

∗−

1.2

46∗∗

∗−

1.3

60∗∗

∗

Max

(LD

-10,

EX

+1)

toL

D−

0.939∗∗

∗−

0.222∗∗

∗−

0.447∗∗

∗−

0.8

45∗∗

∗−

1.2

70∗∗

∗−

1.4

85∗∗

∗

Max

(LD

-20,

EX

+1)

toL

D−

2.993∗∗

∗−

2.711∗∗

∗−

2.117∗∗

∗−

2.7

89∗∗

∗−

3.5

13∗∗

∗−

3.5

65∗∗

∗

Max

(LD

-30,

EX

+1)

toL

D−

3.534∗∗

∗−

3.786∗∗

∗−

2.613∗∗

∗−

3.6

36∗∗

∗−

4.2

49∗∗

∗−

4.651∗∗

∗

EX

+1

toL

D−

3.613∗∗

∗−

4.226∗∗

∗−

2.7

01∗∗

∗−

4.0

60∗∗

∗−

4.4

09∗∗

∗−

5.022∗∗

∗

Pan

elC

:R

etu

rns

afte

rth

eis

sue

exec

uti

onp

erio

dL

D+

1to

LD

+10

1.3

61∗∗

∗0.

000

1.810∗∗

∗−

0.1

50

1.045∗∗

∗−

0.799∗∗

∗

LD

+1

toL

D+

202.2

61∗∗

∗0.

000

3.206∗∗

∗−

0.2

27

1.647∗∗

∗−

1.176∗∗

∗

LD

+1

toL

D+

302.8

54∗∗

∗0.

000

4.314∗∗

∗−

0.2

77

1.941∗∗

∗−

1.590∗∗

∗

Pan

elD

:Is

sue

pri

ced

isco

unt

du

rin

gth

eis

sue

exec

uti

on

per

iod

Dis

cou

nt

atE

X-1

−23.

721

−22.8

66

Dis

cou

nt

atE

X+

1−

17.

87

−17.1

65

Dis

cou

nt

atS

E−

15.

199

−13.7

31

Ch

ange

:E

X+

1to

SE

2.724∗∗

∗1.6

57∗∗

∗

Dis

cou

nt

atL

D−

12.

612

−12.5

Ch

ange

:E

X+

1to

LD

5.266∗∗

∗2.8

32∗∗

∗

∗ ,∗∗

and

∗∗∗

ind

icat

esi

gnifi

can

ceat

the

10,

5an

d1%

leve

lsre

spec

tive

ly.

50

Table III. Explaining returns and abnormal short activity during rights execution periodThe full sample includes rights issues with the ex-rights date between from 2002 to 2014. The sample withstock lending data includes rights issues from firms covered in the Markit / Data Explorer database. Thedependent variable is either BHAR(-20), the buy and hold abnormal return computed for the event windowthat starts from either the ex-rights date plus one day or 20 working days before the listing date (whicheveris later) to the listing date, or ∆Onloan, the change in the daily average percentage of outstanding shareson loan from the pre-issue period (from 4 to 1 month before the announcement date) to the issue executionperiod (from the ex-rights date to the listing date). Discount EX is the issue price divided by the market priceon the ex-rights date, minus one. Issue Duration is the natural logarithm of the number of days between theex-rights date and the listing date. Issue Ratio is the number of new shares offered relative to one old share.Renounceability is a binary variable equal to one if the rights issued are transferable, and zero otherwise.Price Runup is the index adjusted return from six months prior the announcement date to the last tradingday before the announcement date. The following variable are computed using daily averages for the periodof 4 months to 1 month before the announcement date. Pre-issue Onloan Shares is the number of shareson loan divided by the total number of outstanding shares. Pre-issue Firm Size is the natural logarithm ofmarket capitalization. Pre-issue Dividend is dividend per share divided by share price. Pre-issue Liquidityis trading volume (in shares) scaled by the number of outstanding shares. Pre-issue Analyst is the naturallogarithm of the number of analysts covering the issuing firm. Cluster-adjusted standard errors are reportedin parentheses.

Fullsample

All issues with stock lending dataIssues with pre-issue

lendable shares

BHAR(-20) ∆Onloan BHAR(-20) ∆Onloan BHAR(-20) ∆Onloan

Pre-issue Onloan Shares −0.302∗ 0.231∗∗∗ −0.398∗∗ 0.155∗∗∗

(0.167 ) (0.037 ) (0.203 ) (0.036 )Discount EX 0.128∗∗∗ −0.002∗∗∗ 0.135∗∗∗ −0.002∗∗∗ 0.125∗∗∗ −0.021∗∗∗

(0.011 ) (0.001 ) (0.011 ) (0.001 ) (0.021 ) (0.001 )Issue Duration 0.021∗∗∗ 0.001 0.032∗∗∗ 0.001 0.022∗ 0.001

(0.006 ) (0.001 ) (0.008 ) (0.001 ) (0.012 ) (0.001 )Renounceability 0.006 0.001∗ 0.007 0.001∗ 0.002 0.002

(0.005 ) (0.001 ) (0.005 ) (0.001 ) (0.001 ) (0.001 )Issue Ratio −0.014∗∗∗ 0.001 −0.016∗∗∗ 0.001 −0.017∗∗∗ 0.001

(0.002 ) (0.001 ) (0.003 ) (0.001 ) (0.004 ) (0.001 )Pre-issue Firm Size 0.005∗∗∗ 0.001∗∗∗ 0.005∗∗∗ 0.001∗∗∗ 0.010∗∗∗ 0.001∗∗∗

(0.002 ) (0.000 ) (0.002 ) (0.000 ) (0.002 ) (0.000 )Pre-issue Liquidity −0.534∗∗∗ 0.028∗∗∗ −0.442∗∗∗ 0.012∗ −0.115 −0.008

(0.148 ) (0.009 ) (0.201 ) (0.007 ) (0.314 ) (0.006 )Pre-issue Dividend 0.229∗∗∗ 0.023∗∗∗ 0.002∗∗∗ 0.023∗∗∗ 0.003∗∗∗ 0.030

(0.071 ) (0.009 ) (0.001 ) (0.009 ) (0.001 ) (0.020 )Pre-issue Runup −0.013∗∗∗ 0.001∗∗∗ −0.013∗∗∗ 0.001∗∗∗ −0.009∗∗ 0.001

(0.003 ) (0.000 ) (0.005 ) (0.000 ) (0.007 ) (0.001 )Pre-issue Analyst 0.002 0.003∗∗∗ 0.004 0.002∗∗∗ 0.001 0.003∗∗∗

(0.003 ) (0.001 ) (0.003 ) (0.001 ) (0.004 ) (0.001 )Country×year fixed effects YES YES YES YES YES YESAdjusted R-squared 0.091 0.091 0.096 0.096 0.094 0.094No. of observations 10715 7536 7536 7536 3757 3757∗, ∗∗ and ∗∗∗ indicate significance at the 10, 5 and 1% levels respectively.

51

Table IV. Country-level short selling restrictions and execution-period abnormal returnsThe full sample includes rights issues with the ex-rights date between from 2002 to 2014. The dependentvariable, BHAR(-20), is buy and hold abnormal return computed for the event window that starts fromeither the ex-rights date plus one day or 20 working days before the listing date (whichever is later) to thelisting date. Up-tick Rule is an indicator for whether a country imposes the up-tick rule in a given year.Naked Short Ban is an indicator for whether a country bans naked short selling activity in a given year.Short Disclosure is an indicator for whether a country requires short sales to be disclosed in some forms in agiven year. Financial Firm Short Ban is an indicator for whether a country imposes a ban on short selling offinancial institutions in a given year. All of the above indicators take the value of one when a country bansall forms of short selling activity in a given year. Discount EX is the issue price divided by the market priceon the ex-rights date, minus one. Issue Duration is the natural logarithm of the number of days between theex-rights date and the listing date. Issue Ratio is the number of new shares offered relative to one old share.Renounceability is a binary variable equal to one if the rights issued are transferable, and zero otherwise.Pre-issue Runup is the index adjusted return from six months prior the announcement date to the lasttrading day before the announcement date. The following variable are computed using daily averages for theperiod of 4 months to 1 month before the announcement date. Pre-issue Firm Size is the natural logarithmof market capitalization. Pre-issue Dividend is dividend per share divided by share price. Pre-issue Liquidityis trading volume (in shares) scaled by the number of outstanding shares. Pre-issue Analyst is the naturallogarithm of the number of analysts covering the issuing firm. Cluster-adjusted standard errors are reportedin parentheses.

(1) (2) (3) (4) (5)

Up-tick Rule 0.028∗∗ 0.034∗∗∗

(0.011 ) (0.011 )Naked Short Ban 0.013 0.021∗∗

(0.023 ) (0.01)Short Disclosure −0.015 −0.005

(0.013 ) (0.011 )Financial Firm Short Ban 0.001 −0.014

(0.012 ) (0.011 )Discount EX 0.125∗∗∗ 0.126∗∗∗ 0.127∗∗∗ 0.139∗∗∗ 0.142∗∗∗

(0.019 ) (0.019 ) (0.019 ) (0.018 ) (0.019 )Issue Duration 0.023∗∗∗ 0.03 ∗∗∗ 0.028∗∗∗ 0.024∗ 0.02

(0.009 ) (0.01) (0.009 ) (0.013 ) (0.013 )Renounceability 0.006 0.007 0.007 0.014∗ 0.011

(0.007 ) (0.006 ) (0.007 ) (0.008 ) (0.009 )Issue Ratio −0.016∗∗∗ −0.015∗∗∗ −0.015∗∗∗ −0.017∗∗∗ −0.017∗∗∗

(0.004 ) (0.004 ) (0.004 ) (0.003 ) (0.004 )Price Runup 0.014∗∗∗ 0.013∗∗∗ 0.013∗∗∗ 0.015∗∗∗ 0.017∗∗∗

(0.003 ) (0.003 ) (0.003 ) (0.004 ) (0.005 )Pre-issue Firm Size 0.007∗∗∗ 0.007∗∗∗ 0.007∗∗∗ 0.005∗∗ 0.004

(0.002 ) (0.002 ) (0.002 ) (0.002 ) (0.003 )Pre-issue Liquidity 0.027 0.01 0.017 −0.704∗∗∗ −0.643∗∗∗

(0.034 ) (0.032 ) (0.033 ) (0.13) (0.151 )Pre-issue Dividend 0.249∗∗∗ 0.237∗∗∗ 0.239∗∗∗ 0.275∗∗∗ 0.300∗∗∗

(0.087 ) (0.084 ) (0.083 ) (0.072 ) (0.081 )Pre-issue Analyst 0.001 0.001 0.001 0.003 0.005

(0.003 ) (0.003 ) (0.003 ) (0.004 ) (0.004 )Country fixed effects YES YES YES YES YESYear fixed effects YES YES YES YES YESAdjusted R-squared 0.096 0.091 0.092 0.104 0.117No. of observation 10149 10149 10149 10149 10149∗, ∗∗ and ∗∗∗ indicate significance at the 10, 5 and 1% levels respectively.

52

Table

V.

Shar

pR

egre

ssio

nD

isco

nti

nuit

yA

nal

ysi

sof

Shor

tSel

ling

Con

stra

ints

Cre

ated

by

S&

PA

SX

300

Index

Ass

ignm

ent

Th

eta

ble

anal

yze

stw

od

iffer

ent

sam

ple

.T

he

firs

tsa

mp

leco

mp

rise

sall

list

edA

ust

rali

an

firm

s(i

nfi

rm-q

uart

ers)

that

mee

tth

em

inim

um

(lis

tin

gan

dli

qu

idit

y)

elig

ibil

ity

crit

eria

use

din

the

con

stru

ctio

nof

the

S&

PA

SX

300

ind

ex.

Th

issa

mp

leis

use

dto

veri

fyth

ed

isco

nti

nuit

yin

short

sell

ing

act

ivit

yar

oun

dth

eS

&P

AS

X30

0in

dex

incl

usi

oncu

toff

.T

he

seco

nd

sam

ple

incl

ud

esri

ghts

issu

esin

Au

stra

lia

by

firm

sth

at

mee

tth

ese

ind

exel

igib

ilit

ycr

iter

ia.

Th

eal

tern

ativ

ed

epen

den

tva

riab

les

exam

ined

are

as

foll

ows.

OnloanShares

isth

enu

mb

erof

share

son

loan

div

ided

by

the

tota

lnu

mb

erof

outs

tan

din

gsh

ares

.Len

dableShares

isth

enu

mb

erof

share

sav

ail

ab

lefo

rst

ock

len

din

gd

ivid

edby

the

tota

lnu

mb

erof

ou

tsta

nd

ing

share

s.F

or

the

firs

t(a

llfi

rms)

sam

ple

thes

ear

em

easu

red

ind

ail

yfr

equ

ency

an

dfo

rth

ese

cond

(rig

hts

issu

es)

sam

ple

they

are

com

pu

ted

as

dail

yav

erage

over

the

per

iod

of4

to1

mon

thb

efor

eth

ean

nou

nce

men

td

ate

of

each

issu

e.BHAR(-20)

isth

eb

uy

an

dhold

ab

norm

al

retu

rnco

mp

ute

dfo

rth

eev

ent

win

dow

that

star

tsfr

omei

ther

the

ex-r

ights

dat

ep

lus

on

ed

ayor

20

work

ing

day

sb

efore

the

list

ing

date

(wh

ich

ever

isla

ter)

toth

eli

stin

gd

ate

.∆Discount

isth

ech

ange

inis

sue

dis

cou

nt

from

one

day

afte

rth

eex

-rig

hts

date

toth

eli

stin

gd

ate

.T

he

forc

ing

vari

ab

lein

the

dis

conti

nu

ity

regre

ssio

nis

firm

size

,m

easu

red

asth

en

atu

ral

loga

rith

mof

pre

-iss

ue

mark

etca

pit

ali

zati

on

(mea

sure

din

$Am

illi

on

).T

he

forc

ing

vari

ab

leu

sed

tom

od

elth

ed

isco

nti

nu

ity

isfr

ee-fl

oat

mar

ket

cap

ital

izat

ion

ran

k(1

stra

nk

=la

rges

tfi

rm)

wit

hre

spec

tto

all

list

edfi

rms

elig

ible

for

the

S&

PA

SX

300

ind

exco

nst

ruct

ion

.E

ach

firm

’sra

nk

isce

nte

red

by

sub

trac

tin

gth

ere

leva

nt

S&

PA

SX

300

cut-

off

ran

k.

Ou

tsid

eA

SX

300

isan

ind

icato

rth

at

iseq

ual

toon

eis

afi

rmis

ran

ked

outs

ide

ofth

ecu

toff

for

the

ind

ex.

Insp

ecifi

cati

on

sw

ith

ad

dit

ion

al

cova

riate

s,th

efo

llow

ing

vari

ab

les

are

incl

ud

ed.DiscountEX

isth

eis

sue

pri

ced

ivid

edby

the

mar

ket

pri

ceon

the

ex-r

ights

date

,m

inu

son

e.IssueDuration

isth

en

atu

ral

logari

thm

of

the

nu

mb

erof

day

sb

etw

een

the

ex-r

ights

dat

ean

dth

eli

stin

gd

ate.

IssueRatio

isth

enu

mb

erof

new

share

soff

ered

rela

tive

toon

eold

share

.Ren

ounceability

isa

bin

ary

vari

ab

leeq

ual

toon

eif

the

righ

tsis

sued

are

tran

sfer

able

,an

dze

root

her

wis

e.Pre-issueRunup

isth

ein

dex

adju

sted

retu

rnfr

om

six

month

sp

rior

the

an

nou

nce

men

td

ate

toth

ela

sttr

adin

gd

ayb

efor

eth

ean

nou

nce

men

td

ate

.T

he

foll

owin

gva

riab

leare

com

pu

ted

usi

ng

dail

yav

erages

for

the

per

iod

of

4m

onth

sto

1m

onth

bef

ore

the

ann

oun

cem

ent

dat

e.Pre-issueFirm

Size

isth

en

atu

ral

logari

thm

of

mark

etca

pit

ali

zati

on

.Pre-issueDividen

dYield

isd

ivid

end

per

share

div

ided

by

shar

ep

rice

.Pre-issueLiquidity

istr

ad

ing

volu

me

(in

share

s)sc

ale

dby

the

nu

mb

erof

ou

tsta

nd

ing

share

s.Pre-issueAnalyst

Coverage

isth

en

atu

ral

loga

rith

mof

the

nu

mb

erof

anal

yst

sco

veri

ng

the

issu

ing

firm

.C

lust

er-a

dju

sted

stan

dard

erro

rsare

rep

ort

edin

pare

nth

eses

.

All

list

edfi

rms

mee

tin

gS

&P

AS

X30

0el

igib

ilit

ycr

iter

iaR

ights

issu

esof

firm

sm

eeti

ng

S&

PA

SX

300

elig

ibil

ity

crit

eria

Onloan

shares

Len

dable

Shares

Onloan

Shares

Len

dable

Shares

BHAR(-20)

BHAR(-20)

∆Discount

∆Discount

Mod

el1:

Loca

lli

nea

rO

uts

ide

AS

X30

0−

0.37

2∗∗

−0.

024∗∗

−0.3

35∗∗

−0.

047∗∗

∗0.

121∗

0.1

19∗∗

−0.

098∗∗

−0.

115∗∗

(0.1

73)

(0.0

11

)(0.1

4)

(0.0

1)

(0.0

63

)(0.0

52

)(0.0

43

)(0.0

51

)M

od

el2:

Loca

lqu

arti

cp

olyn

omia

lO

uts

ide

AS

X30

0−

0.51

0∗

−0.

046∗∗

−0.9

64∗∗

∗−

0.123∗∗

∗0.

227∗∗

0.2

34∗∗

−0.

178∗

−0.

214∗∗

(0.2

78)

(0.0

21

)(0.1

73

)(0.0

2)

(0.1

15

)(0.0

97

)(0.1

07

)(0.1

03

)A

dd

itio

nal

cova

riat

esN

ON

ON

OY

ES

NO

YE

SN

OY

ES

Lef

tob

s(i

nsi

de

AS

X30

0)17

1282

171282

97

97

204

204

204

204

Rig

ht

obs

(ou

tsid

eA

SX

300)

1306

08130608

226

226

552

552

552

552

∗ ,∗∗

and

∗∗∗

ind

icat

esi

gnifi

can

ceat

the

10,

5an

d1%

leve

lsre

spec

tive

ly.

53

Table

VI.

Fuzz

yR

egre

ssio

nD

isco

nti

nuit

yA

nal

ysi

susi

ng

aR

egula

tory

Res

tric

tion

onN

aked

Shor

tSal

esT

he

full

sam

ple

incl

ud

esri

ghts

issu

esin

Au

stra

lia

wit

hth

eex

-rig

hts

date

bet

wee

nfr

om

2002

toth

ed

ayw

hen

nake

dsh

ort

sell

ing

isb

an

ned

in2008.

Th

ed

epen

den

tva

riab

leis

eith

erBHAR(-20),

the

bu

yan

dh

old

ab

norm

al

retu

rnco

mp

ute

dfo

rth

eev

ent

win

dow

that

start

sfr

om

eith

erth

eex

-rig

hts

dat

ep

lus

one

day

or20

wor

kin

gd

ays

bef

ore

the

list

ing

date

(wh

ich

ever

isla

ter)

toth

eli

stin

gd

ate

,or

∆Discount,

the

chan

ge

inis

sue

dis

cou

nt

from

one

day

afte

rth

eex

-rig

hts

dat

eto

the

list

ing

date

.T

he

run

nin

gva

riab

lein

the

dis

conti

nu

ity

regre

ssio

nis

firm

size

,m

easu

red

as

the

natu

ral

logari

thm

ofp

re-i

ssu

em

arke

tca

pit

aliz

atio

n(m

easu

rein

$Am

illi

on

).MVC

+is

an

ind

icato

rfo

rw

het

her

afi

rm’s

pre

-iss

ue

mark

etca

pit

ali

zati

on

isgre

ate

rth

an

A$1

00m

illi

on.NSS

isan

ind

icat

orfo

rw

het

her

an

issu

ing

firm

isin

the

AS

X’s

ap

pro

ved

secu

riti

esfo

rn

ake

dsh

ort

sell

ing.

Insp

ecifi

cati

on

sw

ith

add

itio

nal

cova

riat

es,

the

foll

owin

gva

riab

les

are

incl

ud

ed.DiscountEX

isth

eis

sue

pri

ced

ivid

edby

the

mark

etp

rice

on

the

ex-r

ights

date

,m

inu

son

e.IssueDuration

isth

en

atu

ral

loga

rith

mof

the

nu

mb

erof

day

sb

etw

een

the

ex-r

ights

date

an

dth

eli

stin

gd

ate

.IssueRatio

isth

enu

mb

erof

new

share

soff

ered

rela

tive

toon

eol

dsh

are.

Ren

ounceability

isa

bin

ary

vari

ab

leeq

ual

toon

eif

the

rights

issu

edare

transf

erable

,an

dze

rooth

erw

ise.

Pre-issue

Runup

isth

ein

dex

adju

sted

retu

rnfr

omsi

xm

onth

spri

or

the

an

nou

nce

men

td

ate

toth

ela

sttr

ad

ing

day

bef

ore

the

an

nou

nce

men

td

ate

.T

he

foll

owin

gva

riab

lear

eco

mp

ute

du

sin

gd

aily

aver

ages

for

the

per

iod

of

4m

onth

sto

1m

onth

bef

ore

the

an

nou

nce

men

td

ate

.Pre-issueDividen

dis

div

iden

dp

ersh

are

div

ided

by

shar

ep

rice

.Pre-issueLiquidity

istr

ad

ing

volu

me

(in

share

s)sc

ale

dby

the

nu

mb

erof

ou

tsta

nd

ing

share

s.Pre-issueAnalyst

isth

en

atu

ral

loga

rith

mof

the

nu

mb

erof

anal

yst

sco

ver

ing

the

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54

Table VII. Predictability of post-issue abnormal returnsThe full sample includes rights issues with the ex-rights date between 2002 to 2014. The sample withstock lending data includes rights issues from firms covered in the Markit / Data Explorer database. Thedependent variable is BHAR(+10), BHAR(+20), or BHAR(+30), which is buy and hold abnormal returncomputed for the period of 10, 20, or 30 trading days after the listing date. BHAR(-20) is buy and holdabnormal return computed for the event window that starts from either the ex-rights date plus one day or20 trading days before the listing date (whichever is later) to the listing date. ∆Onloan Shares is the changein the daily average percentage of outstanding shares on loan from the pre-issue period (from 4 to 1 monthbefore the announcement date) to the issue execution period (from the ex-rights date to the listing date).Discount EX is the issue price divided by the market price on the ex-rights date, minus one. Issue Durationis the natural logarithm of the number of days between the ex-rights date and the listing date. Issue Ratio isthe number of new shares offered relative to one old share. Renounceability is a binary variable equal to oneif the rights issued are transferable, and zero otherwise. Price Runup is the index adjusted return from sixmonths prior the announcement date to the last trading day before the announcement date. The followingvariable are computed using daily averages for the period of 4 months to 1 month before the announcementdate. Pre-issue Firm Size is the natural logarithm of market capitalization. Pre-issue Dividend is dividendper share divided by share price. Pre-issue Liquidity is trading volume (in shares) scaled by the numberof outstanding shares. Pre-issue Analyst is the natural logarithm of the number of analysts covering theissuing firm. Cluster-adjusted standard errors are reported in parentheses.

Full sample Issues with stock lending data

BHAR(+10) BHAR(+20) BHAR(+30) BHAR(+10) BHAR(+20) BHAR(+30)

BHAR(-20) −0.019∗ −0.035∗∗ −0.023(0.011 ) (0.016 ) (0.017 )

∆Onloan Shares 0.122 0.268∗ 0.551∗∗∗

(0.117 ) (0.160 ) (0.198 )Discount EX −0.016∗∗ −0.022∗∗ −0.026∗ −0.035∗∗∗ −0.045∗∗∗ −0.034

(0.008 ) (0.01) (0.014 ) (0.013 ) (0.017 ) (0.025 )Issue Duration −0.014∗∗∗ −0.017∗∗∗ −0.025∗∗∗ −0.03 ∗∗∗ −0.03 ∗∗∗ −0.039∗∗∗

(0.005 ) (0.007 ) (0.009 ) (0.008 ) (0.01) (0.013 )Renounceability 0.003 0.008 0.006 0.001 0.005 0.009

(0.003 ) (0.005 ) (0.006 ) (0.004 ) (0.006 ) (0.008 )Issue Ratio −0.005∗∗∗ −0.006∗∗∗ −0.005∗ −0.003 −0.004 0.001

(0.001 ) (0.002 ) (0.003 ) (0.002 ) (0.003 ) (0.003 )Pre-issue Firm Size −0.004∗∗∗ −0.008∗∗∗ −0.01 ∗∗∗ −0.005∗∗∗ −0.012∗∗∗ −0.014∗∗∗

(0.001 ) (0.002 ) (0.002 ) (0.002 ) (0.003 ) (0.004 )Pre-issue Liquidity −0.257∗∗∗ −0.417∗∗∗ −0.858∗∗∗ −0.398∗∗∗ −0.823∗∗∗ −1.435∗∗∗

(0.077 ) (0.131 ) (0.153 ) (0.13) (0.214 ) (0.218 )Pre-issue Dividend −0.082 −0.148∗ −0.124 −0.079 −0.192∗∗ −0.213∗

(0.053 ) (0.079 ) (0.091 ) (0.072 ) (0.095 ) (0.129 )Pre-issue Runup −0.002 0.001 0.001 −0.003 0.001 0.003

(0.002 ) (0.003 ) (0.004 ) (0.003 ) (0.004 ) (0.005 )Pre-issue Analyst 0.003∗ 0.005∗ 0.003 0.004 0.007∗ 0.005

(0.002 ) (0.003 ) (0.004 ) (0.002 ) (0.004 ) (0.005 )Country×year fixed ef-fects

YES YES YES YES YES YES

No. of observations 10715 10715 10715 5278 5278 5278∗, ∗∗ and ∗∗∗ indicate significance at the 10, 5 and 1% levels respectively.

55

Table VIII. Execution-period short activity and retail shareholder wealth lossThe sample includes accelerated rights issues (entitlement offers) conducted in Australia with the ex-rightsdate between 2002 to 2014. For each issue, Retail Takeup is the proportion of the pro-rata allocated sharesin the retail component that are taken up by retail shareholders. WL(+10), WL(+20), and WL(+30) arethe wealth loss incurred by retail shareholders by not taking up their entitlements, relative to the ex-postshare price at 10, 20, and 30 days after the listing date. ∆Short volume is the change in the daily averagepercentage short trading volume from the pre-issue period (from 4 to 1 month before the announcementdate) to the issue execution period (from the ex-rights date to the listing date). Discount EX is the issueprice divided by the market price on the ex-rights date, minus one. Discount SE, and Discount LD are thesame measure computed for the subscription end date and the listing date. Issue Duration is the naturallogarithm of the number of days between the ex-rights date and the listing date. Issue Ratio is the numberof new shares offered relative to one old share. Renounceability is a binary variable equal to one if the rightsissued are transferable, and zero otherwise. Price Runup is the index adjusted return from six months priorthe announcement date to the last trading day before the announcement date. The following variable arecomputed using daily averages for the period of 4 months to 1 month before the announcement date. Pre-issue Firm Size is the natural logarithm of market capitalization. Pre-issue Dividend is dividend per sharedivided by share price. Pre-issue Liquidity is trading volume (in shares) scaled by the number of outstandingshares. Pre-issue Analyst is the natural logarithm of the number of analysts covering the issuing firm. Robuststandard errors are reported in parentheses.

All accelerated issuesAccelerated issues with short

volume dataRetailTakeup

RetailTakeup

RetailTakeup

RetailTakeup

WL(+10) WL(+20) WL(+30)

∆Short volume −0.475∗∗∗ −0.019 −0.046∗ −0.070∗∗

(0.206 ) (0.039 ) (0.025 ) (0.031 )Discount EX −1.185∗∗∗ −1.145∗∗∗ 0.047 0.039 0.043∗

(0.113 ) (0.121 ) (0.029 ) (0.024 ) (0.023 )Discount SE −1.258∗∗∗

(0.084 )Discount LD −0.938∗∗∗

(0.100 )Retail tranche size 0.038 0.037 0.014 0.046 0.034∗ 0.021∗ 0.024∗

(0.093 ) (0.071 ) (0.08) (0.106 ) (0.018 ) (0.013 ) (0.013 )Issue Duration 0.042 0.001 0.001 0.03 0.008 0.002 −0.005

(0.098 ) (0.097 ) (0.103 ) (0.128 ) (0.014 ) (0.014 ) (0.015 )Renounceability −0.019 −0.036 −0.017 −0.059 0.004 0.002 0.003

(0.031 ) (0.026 ) (0.028 ) (0.037 ) (0.006 ) (0.005 ) (0.005 )Issue Ratio −0.14 ∗∗∗ −0.144∗∗∗ −0.118∗∗∗ −0.134∗∗∗ 0.010∗∗∗ 0.019∗∗∗ 0.017∗∗∗

(0.017 ) (0.02) (0.02) (0.018 ) (0.004 ) (0.004 ) (0.004 )Pre-issue Firm Size −0.004 −0.009 −0.006 0.012 0.001 0.001 0.001

(0.01) (0.009 ) (0.009 ) (0.013 ) (0.003 ) (0.002 ) (0.002 )Pre-issue Liquidity 0.379 −0.153 1.195 4.607 −0.553 0.06 1.039

(3.854 ) (2.971 ) (2.932 ) (5.151 ) (0.703 ) (0.646 ) (0.826 )Pre-issue Dividend 0.183 0.047 0.139 0.072 0.008 −0.012 −0.022

(0.225 ) (0.193 ) (0.204 ) (0.208 ) (0.023 ) (0.024 ) (0.026 )Pre-issue Runup 0.031 0.05 ∗∗∗ 0.064∗∗∗ 0.027 −0.001 −0.002 −0.003

(0.019 ) (0.018 ) (0.02) (0.022 ) (0.002 ) (0.002 ) (0.002 )Pre-issue Analyst 0.048∗∗ 0.041∗∗ 0.029 0.062∗∗∗ −0.003∗ −0.003 −0.002

(0.021 ) (0.019 ) (0.021 ) (0.022 ) (0.002 ) (0.002 ) (0.002 )No. of observations 212 212 212 175 175 175 175∗, ∗∗ and ∗∗∗ indicate significance at the 10, 5 and 1% levels respectively.

56