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I am befuddled by the announcement of a rights offering in which stockholders were given the right to purchase the stock at a price of 5.50$ when the market price was at 4.40$. This seemed very unrealistic, I mean who would do that? But to my immense surprise the market price increased to 5.50$ in the following week! Why is that? None of the company fundamentals have changed and there were no other news. If the company had set a price of 6.00$ in the rights offering, would the price have increased to 6$? Obviously the company thinks that their shares are worth that much but why did the market suddenly agree?

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I am long a micro-cap stock with ticker symbol LGL (https://finance.yahoo.com/quote/LGL?p=LGL). Two months ago they announced they would hold a rights offering in which stockholders will receive transferable rights to purchase additional shares (http://www.businesswire.com/news/home/20170622006127/en/). Not much happened after that and as I expected the stock price fell a little due to the upcoming dilution. However last week they announced (http://www.businesswire.com/news/home/20170816006064/en/) that they would offer the shares for a price of 5.50$ a share (going into effect on September 5). At the time of the announcement the stock was trading around 4.40$. I saw that and was like huh? I couldn't understand why they set the price of the offering so markedly above market price. Over the last week I watched with astonishment a steady increase until the market price hit 5.48$ yesterday. Why did this happen? Obviously management thinks that the company is worth that much, but why did the market simply believe this statement without any additional information?

marked as duplicate by Michael, Nathan L, Community Aug 24 '17 at 23:37

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  • 1
    Why would putting out a rights offering above current price create dilution, which you anticipated? Everything else aside, if a stock is trading at $4.40, then anyone who subscribes for new shares at $5.50 has undiluted the company by increasing its cash reserves by more than the value of the share received. – Grade 'Eh' Bacon Aug 23 '17 at 18:37
  • Your argument is correct. However when they made the first announcement (two months) ago, they didn't specify the subscription price. Lacking other information I expected the subscription price to be at or slightly below the current stock price (which was around 4.66$ two months ago). It was only last week that they publicized that the subscription price would be 5.50$ – ftiaronsem Aug 23 '17 at 18:56
up vote 1 down vote accepted

This seemed very unrealistic, I mean who would do that? But to my immense surprise the market price increased to 5.50$ in the following week! Why is that?

This is strange. It seems that people mistakenly [?] believe that the company should be at 5.5 and currently available cheap. This looks like irrational behaviour. Most of the past 6 months the said stock in range bound to 4.5 to 5. The last time it hit around 5.5 was Feb. So this is definitely strange.

If the company had set a price of 6.00$ in the rights offering, would the price have increased to 6$? Obviously the company thinks that their shares are worth that much but why did the market suddenly agree?

Possibly yes, possible no. It can be answered. More often the rights issue are priced at slight discount to market price.

Why did this happen? Obviously management thinks that the company is worth that much, but why did the market simply believe this statement without any additional information?

I don't see any other information; if the new shares had some special privileges [in terms of voting rights, dividends, etc] then yes. However the announcements says the rights issues is for common shares.

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