Layoffs and underwritten rights offers

In seasoned equity rights offers, the standby underwriting contract resembles the sale of a put option. In the rights offering period, underwriters reduce their exposure to the standby underwriting by purchasing rights hedged with short sale of the common stock. Consistent with Eckbo and Masulis (1992), offers with large rights sell-offs during the offering period experience significant price decline. The offering period price decline and the nature of constraints confronting underwriters may partially explain the preference for general public offers.