The effect of pre-emptive right amendments on shareholder wealth

Abstract

Pre-emptive rights allow existing shareholders to purchase a new offering of shares before the general public. This paper investigates the effect on shareholder wealth of removing pre-emptive rights from corporate charters. Two hypotheses are constrasted: (1) Shareholder wealth maximization suggests that management uses this extra degree of freedom to pick the least cost method for raising new equity; hence, the amendment increases shareholder wealth. (2) Management welfare maximization holds that management will use the passage of the amendment to maximize their own welfare, sometimes to the detriment of shareholders; hence, the amendment decreases shareholder wealth. The evidence indicates that the amendment decreases shareholder wealth.