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Mr Kevin

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CHAPTER ONE

INTRODUCTION

1. Background to the Study

Corporate Kenya is shifting its capital raising gear from corporate bonds to the issuance of rights in an effort to raise funds for growth, working capital and new investment while at the same time reigning in the cost of accessing such funds. A rights issue is an option that a company opts for to raise capital under a seasoned equity offering of shares to raise money. McClure (2005) defines a right issue as an invitation to existing shareholders to purchase additional new shares in the company. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.

A shareholder is an individual or institution (including a corporation) that owns one or more shares of stock in a public or private corporation. Fama (1980) observes that shareholders own stock, but not the corporation. Shareholders wealth is basically the wealth shareholders get to accrue from their ownership of shares in a firm. Shareholders wealth increases either by increase in share prices that bring about capital gain or increase in dividend payments. Ng’ang’a (1999) argues that the expectation of shareholders will push the management to maximize their returns and increase the market value of the firms.

There are two types of rights issue namely the public issue and privileged/private issue. The rights issue gives the existing shareholders securities called “rights”. These are rights to purchase new shares at a discount to the market price on a stated future date. According to Pandey (1999), a right, also called a subscription right or a pre-emptive right, is a privilege granted by a company to its shareholders to buy new shares in proportion to their existing shares in the company. A pre-emptive right entitles a shareholder to maintain

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