Stock price reactions to Swedish rights offerings: Do investors underreact?

Abstract

This paper studies 527, hand-collected, Swedish rights offerings announced over the period January 2007 to December 2016. The results differ from previous studies on rights offerings announcements on small markets, where we find that the announcement of SEOs lowers the stock price of the issuing firms. Moreover, by using a novel approach, we find evidence that the effect from announcing SEOs is not instantaneously incorporated in the stock price. In the six months following the completion of issue, prices continue to drift in the same direction as the announcement abnormal returns, though the drift is only significant for uninsured rights. Hence, our results for uninsured rights are in line with the behavioral theory of underreaction. The underreaction hypothesis is supported by two separate models, the CAR and BHAR model, suggesting that the anomalies detected are not fragile. However, we find that the negative drift is driven by specific years in the sample and is concentrated among larger firms, which raises questions of the economic significance of the anomalies found. The underreaction pattern observed may merely be a manifestation of what Fama refers to as chance.