RIGHTS ISSUE BY AREIT & SREIT IN EQUITY CAPITAL RAISING

Abstract

Due to their unique statutory requirements, REITs rely primarily on external sources of funding to support their growth opportunities, debt repayments, and general working expenses. However, negative market reactions are often associated with equity capital raising conducted by REIT managers given the inevitable dilution of shares. This paper therefore seeks to analyse the underlying factors that matter to shareholders when they are offered the opportunity to subscribe to new shares being offered by REITs via rights issues. Moreover, rationales behind REIT managers’ under-pricing of new shares offered in rights issues are explored alongside how their subscription rates can be improved. The findings fit into the extant literature given that market reaction is indeed negative in both AREIT and SREIT rights issue announcements. High return on equity, low stock volatility, large market share, and undervaluation of a REIT are several characteristics that increase the likelihood of a positive market reaction following a rights issue announcement. Furthermore, the amount of discount offered in rights issue is highly dependent on the REIT’s stock price performance prior to the equity capital raising; higher volatility usually leads to greater discount. Lastly, REITs pursuing rights issue oversubscription should offer high discount rate as deal sweetener and shorten shareholders’ subscription period in order to reduce their opportunity cost of fund.