This thesis examines the impact of agency costs of free cash flow on the market reaction to rights issue announcements. Since a method which firms can use to increase their free cash flow is via a rights issue it is hypothesised that rights issue announcement effects are related to variables which proxy for the extent of agency costs of free cash. Five factors were hypothesised to influence the market's assessment of the likelihood of cash flow abuse: acquisition track record, firm diversification, investment opportunities, shareholder concentration, and changes in management share ownership. In the empirical tests of the theory variables which proxying for price pressure, information asymmetry, and dividend signalling effects were incorporated into the multivariate model for control purposes.
Initial tests using event study methodology found that rights issue announcements were associated with a statistically significant negative two-day announcement period abnormal return of -0.927%. On the whole the results provided only limited support for the free cash flow theory in relation to rights issue announcement effects. However, consistent with free cash flow theory the market was found to react more negatively to rights issue announcements by firms which operated in more than one industry. Control variable that were found to be significantly related to announcement period abnormal returns were firm size, implicit dividend increase, and issue size.