RIGHTS ISSUES IN SINGAPORE

Abstract

Rights issues are invitations to existing shareholders to buy new shares on a pro-rata basis at a stated subscription price for a predetermined time period. Various studies have been done to price rights as options. Therefore the objective of this study is to price rights issued by companies listed on the Stock Exchange of Singapore by adapting Bae and Levy ( 1994) rights valuation models to the case of Singapore. The basic methodology is to use the dilution-adjusted Black-Scholes option pricing model to price rights and then compare the model prices with actual market rights prices. Based on a sample of 40 companies that issued rights from 1990 to 1994, it is found that the market rights prices was significantly less than the model rights prices. The cause for such deviation cannot be attributed simply to dilution alone. Other factors need to be considered as well.