What's wrong with rights issues?IntroductionA rights issue is an issue of rights to purchase new shares, which are issued in proportion to the existing shareholders, Armitage (2007). Rights issues were the dominant form of equity offerings for fundraising in the United States and the United Kingdom. However, there has been a shift towards other forms of share issuance. The United States moved toward firm commitments, according to Eckbo and Masulis (1992). In this, the subscriber guarantees the sale of the issued shares at the agreed price. In the United States, the change occurred in the 1960s. In the United Kingdom, the trend is toward open offers. Open offers are similar to rights issues, but investors cannot sell the shares they purchase in the open offer to other parties. The change in the United Kingdom occurred much later than in the United States, in the 1990s. The aim of this article is to examine why this change occurred and to discover what academics consider to be wrong in terms of rights. In order to achieve this objective, two articles on the subject will be examined. The first article reviewed will be Eckbo and Masulis (1992) and the second will be Armitage (2007). Once the two articles have been examined, a conclusion will compare them and conclude on their main contribution to knowledge.Eckbo and Masulis (1992)BackgroundEckbo and Masulis (1992) open their article by explaining the decline of rights issues and the increase of firm commitments. To illustrate this, Eckbo and Masulis use a sample of 1,249 stock offerings between 1963 and 1981. Eckbo and Masulis highlight the conundrum presented by Smith (1977). Smith finds that rights issues have lower costs than hard commitments. Smith also states that the rights issuer can ensure success... middle of document... that selling large blocks of shares plus rights is rather expensive and means that the apparent cost advantage of the rights issue is illusory. The cost of selling new shares and rights has not yet been documented as a significant cost in rights issues. Both documents are credible in their own right and provide answers to the decline in rights issues. Eckbo and Masulis (1992) are more credible for US markets and Armitage (2007) is more credible for UK markets. However, Armitage (2007) is perhaps the most credible paper because he finds that long-term abnormal returns following rights issues with previously renounced shares are not systematically negative or significant, which suggests that the issuers have been correctly valued. This result slightly invalidates the abnormal performance results of Eckbo and Masulis (1992) and the over/undervaluation theory, but the sample of Eckbo and Masulis (1992) is much larger..