A Background to Firms in the ACE Market




  1. Introduction

Rights issue is a universal and widespread approach used by firms in various countries to generate new capital. From the past evidence, for example in London, there was £1 to £1.5 billion has been raised through rights issues each year in London Stock Exchange (Marsh, 1979). Recently, the rights issue has also been used as a tool for a company to boost new capital. For instance, one of the Finnish Miner Taivivaara’s biggest companies was using rights issue to raise 260 million Euros capital in the largest city of Finland, Helsinki to keep its nickel mine running (Reuters, 2013). Similarly in Malaysia, statistically about RM14.9 billion equity capitals was raised via announcing rights issues in Bursa Malaysia (Shamsher and Annuar, 1993). Besides that, Malaysian Airline System Bhd (MAS) has also announced rights issue to raise new capital and finally brought a higher capital of RM 3.07 billion to the company (The star, 2013). As a result, rights issue is one of the important considerations for a company to be competitive in the investment markets.

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Furthermore, the firms in ACE market are normally small and medium-sized enterprises. Thus they require an avenue to raise new capital so that they can survive and continue to grow. Instead of raising new capital through loans from financial institutions or commercial banks that will boost their liability, issuing rights issues announcement has become their ultimate choices. For instance, EA Holdings Bhd (EAH), which is one of the firms in ACE market, was proposed to issue rights to raise a new capital total RM63.6 million with RM30 million to finance suitable and viable profitable investment, RM28.3 million for working capital and RM4.5million for reducing liability (Free Malaysia Today, 2014). Therefore, there is a need to investigate stock price reaction on rights issues in ACE market due to concerning of firms in generating new capital.

  1. Definition of ACE Market

ACE Market is a secondary stock market in Kuala Lumpur Stock Exchange (KLSE) which is also known as Bursa Malaysia. ‘ACE’ is standing for ‘Access, Certainty and Efficiency’, a revamp of the older Mesdaq Market that was launched in year 1997. This evolution of secondary stock market approach was made in August 2009. Although ACE Market is define as a new version of Mesdaq Market, ACE market is different from Mesdaq Market as it involves sponsor-driven and open to companies of all sectors and item emphasises disclosure and efficiency compared with Mesdaq (The Star, 2009).

According to Bursa Malaysia, mode of listing for companies in ACE market got no minimum operating track record or profit requirement. However, companies with smaller scale of capital that is less than RM6 million profits after tax for the most recent three to five full financial years are not qualified to be listed in the main market and so will be listed in secondary market. Nowadays, according to Bursa Malaysia, there are a total number of 109 companies were listed in ACE Market from year 2006 to the beginning of current year 2014.

ACE Market’s main objective is to allow local and foreign corporations of all sectors to access the capital market under a sponsor-driven framework. This evolution framework will increase efficiency and competitiveness in the stock market while protecting investors concurrently.

  1. Definition of Stock Price

In general, stock price is referred to the price of stock as quoted on an exchange in stock market. Stock price can be quoted as bid and ask price and last traded or terminal price. Any information in stock price is publicity. Everyone can search for the latest stock price through online or other path without any disturbance.

In financial aspect, stock price is the cost for the single share in the company. Since the abnormal return or gain cannot be observed directly, the market stock prices will be use as a component to calculate abnormal return gain or lose in the market around the period of announcing rights issues.

1.4Rights Issues

1.4.1Definition of Rights Issues

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Rights issue is an offer of new shares by a listed firm to its existing shareholders at a discount price and with the pre-emptive rights to subscribe to new shares in a pro-rata basis (Malhotra et al., 2007). The term ‘rights’ is refers to the fact that existing shareholder has the rights of first refusal before the new shares are offered to the public.

The subscription price for the new shares based on the rights is below the market prices of the existing shares or the price offered to the public (Shahid et al., 2010). The pre-emptive right is given to the existing shareholders the entitlement to subscribe a new share issued by a firm at the announcement date. The shareholder who holds the pre-emptive rights can decide to subscribe or sell their rights to the public if they forgo the chance to own the new share. However, they are encouraged only to subscribe the new shares in proportion to the number of shares they already owned (Annuar and Shamsher, 1993).

In this study, the focus is on rights issues as the impact of rights issues on stock prices is important for most of the listed firms in ACE market.

1.4.2Importance of Rights Issues

Besides from aiding the firm to raise new capital, rights issues can benefit the shareholders in three ways. First is to enhance the future stock prices, second is to provide alert shareholders’ or investors’ chances to gain abnormal returns and lastly is to avoid dilution of ownership.

Rights issues play a vital role in determining the future stock prices based on shareholder’s assessment. According to Annuar and Shamsher (1993), existing shareholder have the potential to evaluate the future stock price as they have the rights to decide either to buy or sell the rights. If they are firmly convinced that the firm’s prospect is bright and benefit is guaranteed from the share, they will invest more in the firm via purchasing all of the pro-rata offerings. This will upgrade the firm’s goodwill and thus bid up the share prices. In contrast, if they perceived the firm’s prospect is undesirable such as expected return is not achieved, majority of them will let off their pre-emptive rights to purchase the new shares. Hence, this will bring negative impact to the firm’s share price.

Furthermore, rights issue announcement provide alert investor an opportunity to earn abnormal return when the market is not efficient. The inefficient market provide a means of market prices do not reflects all available information and knowledge of historical prices cannot be used to predict future prices. Thus, if rights issue is perceived as favourable news, investor can use the privately-owned information to outperform the market. This can be proved from the statement of Dawson (1985) which stated that an investor can produce excess return if they have identified information that is not reflected in security prices.

Besides from the benefits of gaining abnormal returns, shareholders can prevent the dilution of their ownership towards the firm’s capital when issuing new stocks. The company will offers existing shareholder the pre-emptive rights to subscribe a given number of shares based on pro-rata basis and at a specified subscription price that is less than the offered price in market. Thus, the existing shareholders proportionate ownership of the company will remain fixed and unchanged by purchasing the new stocks via discounted prices. This can be proved by the statement of Shahid, Xia, Mahmood, and Usman (2010), which stated that rights issues enables existing shareholders to safeguard their proportionate ownership in the company.

1.4.3The Issue of Pre-emptive Rights to be Concern

Minority shareholder is the firm’s equity holder who own below fifty percent ownership of the firm’s equity capital. Thus they do not have the authority to control the votes. However, they can rely on the pre-emptive right given by the firm to protect them from possible abuse by controlling shareholders through subsequent issuance of voting and sharing stock to the public. Some of the existing shareholder would forgo the rights to subscribe new shares and give outsiders the chances to invest in the firm equity. This would thus change the voting percentage own by equity holders. This is because the chance for each shareholder to monopoly the firm’s capital would be lesser if there is more equity holder to share one piece of pie.

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Although issuing rights can protect minority shareholders, such subsequent stock issuance could impair the position of older shareholders. According to Dolley (1934), the voting control of each old shareholder would be diminishing proportionately if the new stock issued were voting stock. The firm may have variety classes of common share and the share with superior voting power is classified as voting stock. If the older shareholders holding a lower voting class of common stocks, their ownership percentage will be reduced via subsequent issuance of voting stock to outsiders. Therefore, existing shareholders should make a deep consideration on deciding whether to subscribe or sell the new shares to public.

1.4.4The Regulatory Framework of Announcing Rights Issues in Malaysia

According to Sukor and Bacha (2010), every firm that wants to undertake a rights issue must meet some basic requirements steps. Firstly, the firm must get approval from it firm’s existing shareholders through an Extraordinary General Meeting (EGM) before seeking approval from Securities Commission (SC).

Secondly, all the issues must be underwritten by a merchant banker. Therefore the firm should appoint a highly reliable banker to act as advisor to carry on the regulated activity of advising corporate finance and prepare prospectus. Besides documented preparation, the responsibility of an underwriter is to take up any issues not fully subscribed by existing shareholders and publics if announced. According to Salamudin, Ariff, and Annuar (1999), an underwritten is responsible in advising the firms the appropriate number of share to be issued, suggested offer prices by considering the net tangible assets of the firm, proceed from the projected; and lastly determining the time to issue rights by considering the prevailing market conditions.

The following step is to inform Bursa Malaysia the four important dates, that’s the intended date of public announcement, the ex-date, the Book Closing Date( BCD) and the closing date for receipt of applications for and acceptance of the rights. Meanwhile, the firm must ensure that the interval between these dates is conforming to Bursa’s requirements which state the maximum and minimum of each interval. As a conclusion, a firm that decides to undertake a rights issue should always refer to this formal framework as a proper guidance.

1.5Problem Statement

There were numerous previous researches had been conducted to examine the price reaction to announcement of rights issues in foreign country such as U.K (March, 1979), U.S (Kothare, 1991), Korea (Kim et al, 1990) and so on. However, there was only one previous similar research reported so far in Malaysia were conducted by Salamudin, Ariff and Annuar, (1999) to examine the price behaviour of seasoned equity issues on a sample of firms in main market, KLSE.

Besides that, ACE Market is a new framework for listing and equity fund raising launched by KLSE in the year 2009, which has not been tested by any researcher to explore further knowledge on rights issue announcement. Thus, this study adds value to the literature by understanding the price reaction on rights issues announcement in ACE Market and to further investigation.

1.6Objectives of Study

The main objective of this study is to identify the relationship between stock price and rights issue announcement. Thus this study is to examine whether there is positive or negative market reaction towards rights issue announcement in ACE Market.


Most of the previous research that has been done in foreign country documents a significant relationship between rights issues and market stock prices. The earliest study made by Marsden (2000) in New Zealand verified that there was a significant negative relationship between rights issues and market stock prices in New Zealand capital market. However, the finding was disproved by the further researcher Marisetty et al., (2008) examined a positive price reaction to rights issues announcement in India market. Hence, the hypothesis is proposed as below:

H1: There is a significant relationship between rights issue and market stock prices.

1.8Significance of Study

This study has delivered a few of important implications to shareholders and investors in ACE Market. Firstly, shareholders can benefit from the rights issues via incremental dividend payment by understanding the uses of rights issues and its effects on the stock market prices. According to Malhotra et al. (2012), rights issues can be decoded as positive information about a firm’s business prospects due to a signal of the firm profitable projects has encountered. Thus, the firm’s stock price will react positively to the rights issue announcement and so increase the shareholder's dividend to be received.

Besides that, shareholders can also learn about perception of potential investor on rights issues through the result of positive or negative stock prices in the market in order to effectively protect their wealth. According to Salamudin et al. (1999), negative stock price reaction was due to the overvalued stock price in the market where the prevailing market stock price is higher than its intrinsic value. When investor think that the firm is overvalued which conveyed a means of issuing rights to raise cheaper funds, they will lower their assessment on market value and then causing price drop. In contrast, the positive stock price reaction was due to the market respond on the rights issue which conveyed an anticipated valuable investment opportunities (Cooney and Kalay,1993).

Lastly, investor can earn interest from the rights issues by identifying the proper time to earn an abnormal return, whether is the time prior to, at or after the post announcement date. Based on the result found by Shamsher and Annuar (1993), investor can earn abnormal return if they sell share a month before the announcement and buy back the shares 10 days after the announcement in KLSE. The result showed provides investor a guidance to anticipate abnormal return in the future by understanding the stock price circulation in stock market.

1.9The Organization of Study

Chapter One discusses about the background of stock price reaction to rights issue announcement in ACE Market and general knowledge in this field. Chapter Two reviews the previous literature review in this field. Chapter Three describes the data and sample used to conduct an empirical testing. Chapter Four discusses the results and findings of the research and Chapter Five concludes the study.