The key to stock price fluctuations: Can rights offerings truly boost the market?

Many investors are asking the same question—when a company announces a cash capital increase through rights offering, will the stock price go up or down? This seemingly simple question actually hides complex market logic. In this article, through real cases and in-depth analysis, we will help you understand the mechanisms behind the rise and fall associated with cash capital increases and rights offerings.

Using Cases to Speak: Two Outcomes After a Cash Capital Increase Rights Offering

Tesla Case: The Capital Increase News Instead Boosts the Stock Price

In 2020, Tesla announced the issuance of new shares worth approximately $2.75 billion, priced at $767 per share, for global expansion and new factory construction. Normally, increasing the supply of new shares should dilute existing shareholders’ equity, potentially putting downward pressure on the stock price.

But the reality was unexpected—Tesla’s stock price not only did not fall but actually rose. The reason is simple: at that time, market confidence in Tesla’s growth prospects was extremely high, and investors believed this capital could translate into future performance growth. The news of the cash capital increase was interpreted as “the company is accelerating expansion,” rather than “shareholders’ equity is being diluted.”

TSMC Case: Stable Fundamentals Support a Smooth Capital Increase

In December 2021, TSMC announced a cash capital increase to expand its business footprint. Once the news broke, market reactions were equally enthusiastic. As a global semiconductor leader, TSMC’s operations and performance were stable, and existing shareholders were willing to actively participate in the rights offering to maintain their ownership ratio. The funds raised were used for R&D, plant expansion, and new technology investments. The market generally viewed this as paving the way for future performance growth, and the stock price accordingly rose.

These two cases tell us: the impact of a cash capital increase rights offering on stock price is not simply “issuing new shares → stock price drops,” but depends on how the market interprets the use of these funds and the company’s development prospects.

Cash Capital Increase Rights Offering: The Standard Process for Fundraising

What is a cash capital increase rights offering?

A cash capital increase rights offering is a financing method where a listed company issues new shares to shareholders to raise funds. Shareholders can choose whether to participate in the subscription. After paying the corresponding amount, they wait for the company to complete accounting and registration procedures before obtaining the new shares.

Why do companies conduct capital increases through rights offerings?

The primary reason is capital needs. Companies may need to raise funds for:

• Business expansion and market development
• R&D and technological upgrades
• Debt repayment and financial restructuring
• Responding to market opportunities or emergencies
• Strategic acquisitions and mergers

Complete Process of a Cash Capital Increase Rights Offering

1. The company’s board of directors approves the capital increase plan, determining the amount to be raised and the subscription price.
2. The company issues a notice of rights offering to existing shareholders, announcing the subscription period, number of shares, and total amount.
3. Shareholders decide whether to participate within the specified period and pay the subscription funds.
4. The company accounts for the capital increase and completes shareholder registration procedures.
5. The new shares are allocated, and shareholders’ ownership proportions are adjusted accordingly.

Why Do Stock Prices Rise or Fall After a Cash Capital Increase Rights Offering?

Three Core Factors Determining Stock Price Movements

Factor 1: Balance Between Stock Supply and Market Demand

The issuance of new shares increases the supply of stocks. If market demand is insufficient to absorb the new supply, the stock price will face downward pressure; conversely, if investors are optimistic about the company’s future prospects, the new shares may be highly sought after, even pushing the stock price higher.

Factor 2: Investors’ Attitude Toward the Capital Increase Plan

The market evaluates whether the funds are used appropriately. If investors believe the capital will be used for high-return strategic investments, they will support; if they worry about inefficient use of funds or that the capital increase is merely a rescue measure, they may sell off the stock.

Factor 3: Dilution Effect on Shareholders’ Equity

Issuing new shares dilutes existing shareholders’ ownership proportion. However, if major shareholders actively participate in the rights offering to maintain their stake, this dilution effect can be mitigated, reducing negative impacts on the stock price.

Three Situations Leading to a Drop in Stock Price After a Cash Capital Increase Rights Offering

1. Excess Supply: The volume of new shares exceeds market demand, forcing the price down to attract buyers.
2. Market Skepticism: Doubts about the purpose of the capital increase lead to selling, causing a sharp decline.
3. Equity Dilution: Major shareholders do not participate sufficiently, leading to a significant decrease in ownership ratio and triggering market concerns.

Three Situations Supporting a Rise in Stock Price After a Cash Capital Increase Rights Offering

1. Strong Demand: Investors have high demand for the new shares, actively subscribing and pushing the price higher.
2. Optimistic Outlook: The market believes the funds will drive company growth, expecting future performance improvements.
3. Shareholder Support: Major shareholders participate actively, maintaining their ownership ratio and stabilizing the stock price.

Advantages and Risks of Cash Capital Increase Rights Offering

Three Major Advantages

Advantage 1: Rapid Large-Scale Fundraising

Compared to bank loans, rights offerings do not require repayment or interest, enabling companies to raise sufficient development funds for plant expansion, acquisitions, or debt repayment.

Advantage 2: Improved Financial Health

Increasing capital reduces debt burden, enhances credit ratings, lowers future financing costs, and strengthens financial resilience.

Advantage 3: Market Confidence Boost

Successful rights offerings are viewed as signals of growth, demonstrating the company’s fundraising ability and development confidence, potentially boosting investor expectations.

Three Major Risks

Risk 1: Dilution of Shareholders’ Equity

Issuing new shares reduces earnings per share, and non-participating shareholders see their ownership decrease, potentially eroding their rights. This effect is more pronounced if the subscription price is below the market price.

Risk 2: Unpredictable Market Reaction

Investors have varied opinions on the capital increase. If market confidence is weak, poor subscription rates or selling pressure may cause the stock to fall sharply.

Risk 3: Hidden Financing Costs

Besides issuance and handling fees, issuing shares below market value can directly harm company value, and long-term costs may outweigh benefits.

When Can Participants Receive the New Shares After Participating in a Cash Capital Increase Rights Offering?

Waiting Period After Subscription

After completing the payment, investors do not receive the new shares immediately. The actual distribution depends on several factors:

Company Administrative Procedures: From the deadline for subscription to the issuance of new shares, the company needs to calculate the subscription amount, prepare shareholder registers, and complete internal approvals, usually taking several weeks.

Exchange Approval: The new shares must be approved by the stock exchange before they can be officially traded. The approval process may extend the waiting time.

Shareholder Registration Procedures: The company must complete shareholder registration to ensure correct distribution, which also takes time.

Generally, from the subscription deadline to the issuance of new shares takes about 2-8 weeks. Investors should be patient and keep track of the progress.

Deepening Understanding: Cash Capital Increase Rights Offering Is Not the Deciding Factor for Stock Price Movements

Many investors mistakenly believe that a cash capital increase rights offering guarantees a stock price increase. This is a misconception. Stock price movements are influenced by multiple factors, including:

• Company Fundamentals: Profitability, revenue growth, industry position
• Market Sentiment: Risk appetite, liquidity, trading activity
• Industry Outlook: Industry cycle, competitive landscape, technological trends
• Macroeconomics: GDP growth, interest rate environment, inflation expectations
• Policy Environment: Regulatory changes, tax policies, industry support

A cash capital increase rights offering is just one variable in this complex system. The true driver of stock price direction is how the market collectively assesses the company’s value. Smart investors do not get carried away by the news of a capital increase but instead conduct further research into the company’s fundamentals and fund utilization before making investment decisions.