Resumen de Pricing efficiency of stock rights issues in Malaysia
Mohd Edil Abd Sukor, Obiyathulla Ismath Bacha
This article undertakes an empirical examination of pure rights issues in Malaysia. Though pricing efficiency is the main focus, we also examine related issues. We study a total of 38 pure rights issues that occurred over the 8-year period January 1998 to December 2005. Using two alternative valuation models, the adjusted Black-Scholes Call Option Model (BSOPM) and the traditional Implied Rights Valuation Model (IRVM), we find the Malaysian market to be inefficient in pricing the rights. Mispricing is quite extensive with a predominance of overpricing. Significantly, both pricing models, despite their different theoretical underpinnings produce similar results. These results are further validated by the returns to our two arbitrage strategies. The trading strategy, which establishes a net short position in the rights produces substantial positive returns, whereas the strategy which effectively goes long the rights, produced marginally negative returns. We found underlying stock price volatility, liquidity and moneyness of the rights to be the key determinants of the extent of mispricing. Finally, we find that underlying stock price volatility was significantly lower post rights issue.
