This paper empirically investigates stock price reaction to rights offerings made in the Korean stock market from 1975 to 1985. It tests hypotheses related to price pressure, wealth redistribution, and singaling. Special attention
is directed to the formulation of empirically testable implications of the investment opportunity hypothesis as part of the signaling hypothesis, and to actual testing of these implications.The present study employs the residual analysis methodology. Abnormal stock returns are measured for periods around the announcement of rights offerings,
and are analyzed cross-sectionally or examined with respect to their behavior over different sample periods.
The data used in the present study consists of cases of equity rights offerings made in the period from 1975 to 1985. Each of these offerings used the par value of the involved stock as its subscription price. An important
characteristic of this study is its use of the research design in which the sample is divided into two subsamples based on the stock market conditions at the time of each equity issue : a rights offering is classified as belonging
to the bullish market subsample if the market condition is characterized by rising stock prices at the time of the offering; otherwise, an offering belongs to the bearish market subsample. Separate cross-sectional regression analyses are applied to the two subsamples. Further, the eleven-year sample period was divided into ten subperiods according to the market conditions and the time-series behavior of the average abnormal returns for the subperiods are investigated. Thus, the particular research design in the present study allows
