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A rights issue is often treated as bad news. The company needs more cash; dilution is coming, and retail investors are scrambling to decide whether to subscribe or sell their entitlements. But there is a specific variation of the rights issue that the market consistently treats differently — and a Malaysian academic study from Universiti Sains Malaysia explains why.
When a company packages free detachable warrants alongside a rights issue, investors react more favourably. That is not just anecdotal. It is measurable, and the data from Bursa Malaysia gives it more weight than you might expect
What the Researchers Actually Studied
Chong, Hooy and Ali (2019), published in the International Journal of Business and Society (Scopus Index Journal ), examined 121 listed firms on the Main Market of Bursa Malaysia that conducted rights issues between January 2006 and December 2012. Of those, 78 firms (64.5%) included free detachable warrants in their offering. The remaining 43 did not.
The researchers used event-study methodology to measure cumulative average abnormal returns (CAAR) around the announcement date, then applied a self-selection-adjusted OLS regression to identify which firm characteristics drove the performance difference.
The study covers a period that includes the 2008 global financial crisis and the 2009 recession — making it a stress test for the theory as much as a normal-conditions analysis.
What Are We Actually Talking About?
Before the findings, a quick grounding on the mechanics.
A rights issue gives existing shareholders the right to buy new shares at a set price — usually below the current market price — before the offer is extended to new investors. It prevents dilution of your ownership stake, but only if you participate. If you do not subscribe, you can sell your entitlement in the open market.
A company warrant is a derivative instrument attached to the rights issue. It gives the holder the right, but not the obligation, to buy shares at a pre-specified exercise price at a future date. That exercise price is typically set above the current market value at the time of issuance.
The combination — a rights issue that bundles in free warrants — is called a unit offering. The warrant is the sweetener. It costs the investor nothing extra at the time of subscription, but it gives them an option on future upside if the company performs.
The Core Finding: Warrants Signal Quality
The headline result is straightforward. Right issues with warrants generated a higher announcement period abnormal return than right issues without warrants. The CAAR difference was statistically significant at the 1% level.
Metric With Warrant Without Warrant
| Metric | With Warrant | Without Warrant |
| Mean CAAR (-1, 0) | +1.89% | -2.12% |
| Offer day return | +0.32% | +0.07% |
Rights issues without warrants, by contrast, showed negative cumulative abnormal returns in the days leading up to the announcement — particularly in the window 10 days before, where CAAR reached -4.39%. The researchers suggest this reflects leakage effects, in which selling pressure builds as the market anticipates a rights issue by a company perceived to be under financial stress.
The key theoretical explanation is information signalling theory, drawing on the model by Chemmanur and Fulghieri (1997). A high-quality firm — one with genuine growth prospects — can credibly signal its confidence by attaching warrants. The exercise price is set above the current market value, so the warrant only pays off if the share price rises. A company that does not believe in its own future has no incentive to offer that option for free. Investors understand this logic, and they price it in at announcement.
The Malaysian Context: Why This Matters Locally
Several aspects of the findings are specific to Malaysia’s market structure.
Most rights issuers with warrants are smaller, high-growth firms. The average intended proceeds from rights issues with warrants were RM75 million, compared with RM802 million for those without warrants. Large established firms — including the depository institutions that appeared in the without-warrant group — do not need the warrant sweetener to attract subscriptions. They have track records, brand recognition and institutional investor support.
Warrants are more common during cold markets. The data show that warrant usage increased in the period following the 2008 subprime crisis, when investor sentiment weakened and companies needed stronger incentives for shareholders to commit capital. This is consistent with the theory: in uncertain times, warrants serve as additional evidence that management believes the worst is behind them.
The construction and manufacturing sectors dominate the issuance of warrants. Building construction, fabricated metals, and electronic components firms made up a large share of warrant-issuing companies. These are sectors where sequential financing makes sense — a company wins a contract, needs capital to execute, uses the rights issue to raise it, and attaches warrants as a promise that more growth is coming.
This profile maps reasonably well to the kinds of mid-cap and small-cap firms that retail investors on Bursa Malaysia actively follow and trade. Understanding what a warrant attachment signals about company quality is directly useful when you receive a rights entitlement notice in your CDS account.
What Drives the Abnormal Return?
The self-selection adjusted regression identified four significant determinants of announcement period return for rights issues with warrants:
Firm size (negative relationship). Smaller firms with rights issues and warrants generate higher abnormal returns. The market prices the growth potential of a small company using warrants as a financing tool more enthusiastically than it does for a large firm going through the same exercise.
Earnings uncertainty (positive relationship). Higher earnings variability was associated with better announcement-period performance, not worse. This is counterintuitive by conventional risk logic, but it aligns with the signalling framework: warrant-issuing firms are often in capital-intensive, high-variance industries where management’s willingness to attach warrants is read as genuine confidence in a turnaround or growth story.
Underwriter reputation (negative relationship). Rights issues underwritten by less reputable investment banks generated higher abnormal returns. More reputable underwriters tend to price the offering more tightly, leaving less room for the market to respond positively. A lesser-known underwriter working with a smaller firm creates greater information asymmetry, and the warrant resolves some of that uncertainty, leading to a stronger market reaction.
Market conditions (negative relationship). Warrants are used more, and work better, in colder markets. When overall market sentiment is subdued and fewer companies are going to market, a warrant attachment stands out and generates more attention. In hot markets, rights issues are common enough that the warrant is less of a differentiator.
What Should Retail Investors Take From This?
Rights issues are not uniformly bad corporate events, despite how they are sometimes treated in retail investor discussions. The presence or absence of a free, detachable warrant is meaningful information — not just a promotional add-on.
If the company attaches warrants, the management is making a bet. They are saying the share price will be meaningfully higher than the current exercise price at some future date. If they are wrong, the warrant expires worthless, and they have given away nothing of value. If they are right, shareholders benefit from both the new shares and the upside from exercising the warrants. The market interprets this as a credibility signal.
If the company does not attach warrants, this does not automatically mean trouble. Large, established firms with strong balance sheets routinely conduct clean rights issues without warrants. But for a smaller company undergoing a rights issue during a difficult period, the absence of warrants warrants closer examination.
Practical check: When you receive a rights issue notice, look at the terms. Is a free warrant attached? What is the exercise price and the exercise period? Does the exercise price represent a realistic target given the company’s growth trajectory? These questions, combined with a review of the company’s use of proceeds, give you a much better picture than the headline subscription price alone.
Limitations Worth Noting
The study covers 2006 to 2012 — a window that includes significant market disruption. The findings may behave differently in sustained bull market conditions. The sample is also limited to Main Market firms; the LEAP Market and ACE Market, where smaller growth companies now list, were not covered. Self-reported accounting data introduce the possibility of earnings management, which is particularly relevant given the study’s finding that earnings uncertainty correlates positively with abnormal returns.
The researchers also acknowledge that extending this analysis to private placements — another common form of seasoned equity offering on Bursa — would be a natural next step. That comparison has not been published for the Malaysian market to date.
This post is based on: Chong, C. F., Hooy, C. W., & Ali, R. (2019). Does company warrant create value for Malaysian right issue? International Journal of Business and Society, 20(1), 194–210.
This content is for educational purposes only and does not constitute financial or investment advice. Always conduct your own research or consult a licensed financial adviser before making investment decisions.