The Right's paradox has been discussed for the three decades (See Smith 1977). In a single sentence, the paradox is why so few firms use rights issues when they appear cheaper (at least at first glance). Over the past 32 years, researchers have documented some costs of rights issues that are not apparent at first glance.
This research is further supported in a new working paper by Ginglinger, Koenig, and Riva. From their abstract:
SSRN-Stock Market Liquidity and the Rights Offer Paradox by Edith Ginglinger, Laure Koenig, Fabrice Riva:
"...using a database of French SEOs. We first document higher direct flotation costs, but also improved stock market liquidity after public offerings and standby rights relative to uninsured rights. We find that blockholder renouncements to subscribe to new shares and stock market liquidity are important determinants of flotation method choice. After controlling for endogeneity in the choice of flotation method, we find that public offerings are cost effective and more liquidity improving than standby rights whereas an uninsured rights offering is the best choice for low liquidity, closely held firms. Our results provide new insights as to why firms choose public offerings despite apparently higher costs."
Cite: Ginglinger, Edith, Koenig, Laure and Riva, Fabrice,Stock Market Liquidity and the Rights Offer Paradox(March 13, 2009). Available at SSRN: http://ssrn.com/abstract=1359094
This will definitely be included in upcoming class notes!
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