Abstract:
In this paper we alert researchers to the potential for unrecognised errors in
using adjusted price and daily return data. This problem is illustrated by
considering the case of ex-rights price adjustments. We present five
alternative adjustment procedures that would be expected to generate
similar results. We show, however, that these procedures result in
significantly different dilution factors and returns. Our investigations
suggest that the problem is associated with the theoretical valuation of the
rights. In a substantial proportion of cases, the standard textbook model is
inappropriate because of the non-standard nature of the rights issue.
Correcting for these non-standard cases is a non-trivial task since they
constitute more than half of the issues. The extent of this problem does not
appear to be well recognised. Deletion of non-standard rights issues
eliminates extreme values in dilution factors, but statistically significant
differences remain. Our moral is simple; uncritical acceptance of data 'as is'
from computer data files may lead researchers to erroneous conclusions. It
also seems noteworthy that the standard textbook model of rights pricing
only applied to a minority of Australian rights issues over recent years. This
result has implications for the calculation of EPS under AASB 1027.As a byproduct,
our analysis suggests that the ex-rights daily return is close to zero.
Adjustment factors; Dilution factors; Returns; Rights issues
