Powering Preemptive Rights with Presubscription Disclosure

Powering Preemptive Rights with Presubscription Disclosure

Jesse Fried

Series number :

Serial Number: 

Date posted :

September 27 2018

Last revised :

October 27 2020
SSRN Share


  • controlling shareholder • 
  • tunneling • 
  • equity issuance • 
  • equity issue • 
  • equity tunneling • 
  • preemptive rights • 
  • minority shareholders • 
  • public shareholders • 
  • rights offers • 
  • rights issues • 
  • Private Firms

Preemptive rights can prevent cheap-issuance tunneling by a controller when outside investors know that the offered securities are cheap. But when outsiders cannot tell whether the securities are cheap or overpriced, preemptive rights fail to prevent such tunneling.

Afraid of purchasing overpriced securities, outsiders may rationally refrain from purchasing (even when the securities are in fact cheap), and then suffer cheap-issuance losses. I put forward a mechanism to make preemptive rights more effective: requiring disclosure of a controller’s subscription commitment, before outside investors must finalize their own, so that outsiders can choose to mimic it.

Published in

Published in: 
Publication Title: 
Chapter in Luca Enriques and Tobias H. Tröger, eds., The Law and Finance of Related Party Transactions (Cambridge University Press, Forthcoming).