The long-term performance of UK stocks after making rights issues

Abstract

There have been many studies that have highlighted the extremely poor performance of US stocks over an extended period following a new equity issue. In this paper, data drawn from the last 40 years are used to examine the performance of the stocks of UK companies over the periods before and after the company announces a rights issue. The author confirms that the typical UK company displays strong performance in the run-up to the issue which subsequently turns into an extended period of underperformance. In order to obtain further insights into this phenomenon, several characteristics of the companies making rights issues are studied, with one of the more interesting findings being the differing market performance of companies contingent on the purpose for which the company raised the additional capital. Finally, the analysis is extended to briefly consider rights issues by companies listed on the continental European markets.