The comparison of sweetened and unsweetened rights offering: sweetener effects of warrants and bonus

This main objectives of this paper are (1) To investigate the market reaction towards the announcement of rights offering with different designs: unsweetened rights offering, sweetened rights offering with warrants and sweetened rights offering with bonus, through the usage of event study analysis, and (2) To examine the sweeteners effect on the announcement returns of rights offering through the average treatment model. Based on the signaling and agency cost of free cash flows hypothesis, the usage of warrants as a sweetener should create a positive impact on the announcement returns of rights offering. Similarly, the signaling and enhanced liquidity hypothesis supports the view that bonus as a sweetener would lead to a more favorable market reaction. This paper finds that the market initially reacts in a severely negative manner to the announcement of sweetened rights offering during its announcement date from day 0 to day 1. Nonetheless, the announcement returns during the full period of announcement from day -1 to day 30 is observed to be greatly positive. Consistent with the hypothesis, the empirical results of this paper provide evidence that the issuance of bonus and warrants as sweeteners do have a positive impact on the announcement return of rights offerings. This paper further explores on the intention of firms issuing such designs of rights offering and finds that the level of information asymmetry faced by the firms plays a major role in the decision to include sweeteners for both bonus and warrants