Issuing New Shares — What Happens to the Slice You Already Own

A 100-Piece Company Makes More Pieces

Let us bring back the company we saw in "What You Actually Own When You Own a Share — And Where You Stand in Line". The company is divided into 100 pieces, and I hold 10 of them, so my share is one-tenth. Every piece comes with one vote, and my share of whatever is left at the end of the line after the company pays off all its debts is proportional to the number of pieces I hold.

One day, the company announces some news. It announces that it will create 20 new pieces and sell them for money. No one touches the 10 pieces in my hands.

A piece owner who hears this news faces three questions. What happens to my share when the number of pieces increases? Who buys the new pieces, and under what conditions? And how has the market historically received news like this?

This article is written with Korean companies where shares are traded, and the Korean rules by which companies announce such news, in mind. Among the cited studies, those that looked outside Korea or whose research summaries (abstracts) do not specify which country's data was used are noted as such on the spot. Studies published in domestic journals without a country specified separately in the abstract are marked as "domestic journal". Furthermore, we do not discuss values for any specific company or at any specific point in time. We write only about what the mechanism looks like and what the research measured.

When the Number of Pieces Grows, What Happens to My Share

When the pieces become 120, my 10 pieces go from 1 in 10 to 1 in 12. In the usual case where one vote is attached to each piece, my votes also shrink by the same proportion, going from 10 out of 100 to 10 out of 120. Without giving up anything myself, my proportion has decreased.

The act of a company printing new shares, selling them, and receiving payment for them is called a paid-in capital increase. It is "paid-in" in the sense that they are sold for money. The shares newly printed at that time are new shares. The 20 newly created pieces are the new shares.

The phenomenon where the number of pieces increases and the share held by existing owners shrinks proportionally is called dilution. The shift from 1 in 10 to 1 in 12 is dilution.

At the exact same moment as dilution, the money from selling the new pieces enters the company's vault. Unlike borrowed money, this money has no fixed repayment amount. Therefore, it is added to the portion that remains at the very end after all debts are paid—namely, the part shared among the owners of the pieces. That remaining amount is now divided among 120 pieces.

Thus, the share returning to a single piece is determined between these two changes. The dividing pieces have increased, and what is to be divided has also increased. If the money brought in by each new piece is greater than the share contained in each original piece, the share per piece grows; if it is less, it shrinks.

Expressed in numbers, it looks like this. If the total share contained in the company is 100, then 1 is contained in each piece. If 20 new pieces bring in 20, 120 pieces divide 120, leaving each piece still at 1. If they bring in 30, 120 pieces divide 130 to become greater than 1, and if they bring in 10, 120 pieces divide 110 to become smaller than 1. This is why the terms under which new pieces are sold matter to existing shareholders.

The money entering the vault is not spent all at once immediately. Domestic listed companies kept an average of 36.5% of the money raised through capital increases as cash in that same year, and the proportion of cash in the company's total assets that year rose significantly (KCI ART002876378 · Domestic Listed Companies).

Two out of three explanations for why they pile it up were supported. They are the explanation that it is piled up to support businesses that will grow in the future, and the explanation that companies with fluctuating earnings prepare it as a buffer. The remaining one, the explanation that capital increases more aimed at taking advantage of temporarily high stock prices involve piling up more, was not supported. What was not supported is the link between such capital increases and the amount piled up. This study did not ask whether such capital increases exist in the first place.

When the pieces increase, the share of votes and remaining assets shrinks proportionally, and payment enters the company's vault. Whether the share of a single piece grows or shrinks depends on the conditions under which the new pieces were sold.

Who Buys the New Pieces First?

There are no owners for the 20 new pieces yet. Depending on who they are sold to first, the method splits into three.

The method of giving people who already own shares the right to buy them first in proportion to what they hold is called a rights offering (주주배정). For me, holding 10 pieces, two spots out of the 20 new pieces come to me first. If I use all those spots, I hold 12 out of 120 pieces, keeping my share at exactly one-tenth. To maintain the ratio, I have to put in that much more money.

The right to buy newly printed shares at a set price is called a preemptive right (신주인수권). The two spots that came before me are preemptive rights.

The method of opening sales up to anyone without discriminating between existing shareholders is called a public offering (일반공모). There are no spots to buy first here, so even those who already own shares buy under the same conditions as others. The method of designating a specific counterpart and handing over new pieces only to them is called a third-party allocation (제3자배정). At this time, the new pieces go to the counterpart chosen by the company, and my ratio shrinks.

The price of the new pieces is often set lower than the market price around the time the price is determined. Setting the price given to new shares lower than the market price is called an issuance price discount (발행가 할인). Even if the same 20 pieces are sold, a large discount means less money comes into the safe. In a rights offering, the spots to buy at that discounted price go to existing shareholders first.

Some people receive spots to buy first but do not use them. Shares that find no owner because they were not bought even after receiving the purchase right are called forfeited shares (실권주). There is a method where shares are sold first through a rights offering, and any forfeited shares remaining after that are opened up to anyone. The name of this method is "rights offering followed by a general public offering of forfeited shares."

In capital increases using this method, how large the discount was made greatly influenced the wealth of shareholders, in other words, the value of the shares held by shareholders (DOI: 10.26845/KJFS.2022.04.51.2.177 · domestic academic journal, 407 cases from 2004 to 2016). The discount rate expresses the size of the discount as a ratio to the market price. The authors read this result to mean that the discount rate communicates information about the company's future to the market. Which direction of the future that information points to is not written in the abstract.

In the same study, the discount rate was set small in two cases. This is when the difference between what people inside the company know and what outside investors know—in other words, the information gap between the inside and outside of the company—is small. And it is when the share of the shareholder holding the most pieces is large.

In the same 407 cases, the ratio of forfeited shares was roughly 14%. When forfeited shares go to someone other than the person who first received the spot, the value of the shares can shift among the people entangled in the capital increase due to the difference between the price of the new pieces and the market price. This is the transfer of wealth. The transfer of wealth created by forfeited shares reached 7.08% of the amount raised through the capital increase. Whom that wealth shifted from and to is not written in the abstract. What is written is only the magnitude.

Preemptive rights can also be passed on to others instead of being used directly. The ratio of people applying to buy, in other words the subscription rate, dropped the longer the period required to complete the procedure took. The system of listing preemptive rights so they can be bought and sold separately on the exchange significantly—meaning by an amount hard to dismiss as coincidence—raised the subscription rate (DOI: 10.26845/KJFS.2022.04.51.2.177).

If it is a rights offering, spots for the existing shareholders' share are secured in front of the new pieces first. If you use all those spots, your ratio stays the same, and if you leave them empty, your ratio shrinks. Looking at 407 cases, the authors read the size of the discount as information about the company's outlook.

When a Public Disclosure Drops

When a company made of 100 slices decides to sell 20 more, that decision is announced for everyone to see. Making facts that a company must share with investors publicly available in a prescribed way is called a public disclosure. News outlets pick up those disclosures and report them.

Under the "shareholder-allotment followed by general public offering for unsubscribed shares" method, disclosures come out twice. The first disclosure announces the intention to increase capital, and the later disclosure announces the final confirmed price of the new slices. Around the first disclosure, stock prices moved by an average of minus 13.83% over three days (DOI: 10.26845/KJFS.2022.04.51.2.177 · 407 disclosures of this single method). This value is measured after removing as much as the overall market moved.

The market reacted to the second disclosure, which announces the finalized price, with a three-day average of minus 4.85%. This reaction had no relation to whether the finalized price went up or down. The later that disclosure came, the more negative the reaction was.

The authors point out that the amount of value drop created alongside the disclosure is not significantly different from the amount actually raised. This means the magnitude by which the company's stock value shrank around the time of the disclosure was similar to the amount of money gathered through the capital increase. They also write that companies should carefully consider various financing alternatives prior to shareholder allotment.

When gathered broadly without regard to method, the magnitude differs. The three-day average of 3,161 initial disclosures was minus 3.69% (KCI ART002092031 · domestic academic journals, 1991–2013). The 407 cases gathered only a single method, whereas the 3,161 cases gathered disclosures regardless of method and over a different period. These two figures alone cannot determine whether the gap between them came from the method or the period.

Dividing the same 3,161 cases into two periods flips the sign. From 1991 to 2001 it was plus 1.56%, and from 2002 to 2013 it was minus 6.56%. Companies that increased capital in the later period were in different circumstances than those in the earlier period. Their performance generated from core business was lower, the cash actually flowing in from their core business was insufficient, and their ratio of debt relative to their own money was high. The proportion of raised money put into facilities and research and development was also significantly lower. The authors read that capital increase disclosures convey information to the market that a company is in poor financial condition, causing stock prices to fall.

Measuring them divided by method points in opposing directions. Shareholder-allotment disclosures showed negative reactions on average, while third-party allotment disclosures showed positive reactions (DOI: 10.21737/RAPS.2022.11.27.4.95 · companies listed on the KOSPI and KOSDAQ markets from 2014 to 2021). The same study notes that reactions by method varied depending on the degree of company risk. One example is that companies whose core business earnings fluctuated wildly when sales changed had worse reactions to shareholder-allotment disclosures. The authors write that third-party allotments, unlike other methods, are accepted by the market as a positive event, which is why many corporations use this method.

One framework explaining why the market reads them this way starts from differences in information. One theoretical paper views the differences in what the buying and selling sides know in financial markets as exceptionally large (DOI: 10.1111/j.1540-6261.1977.tb03277.x · an English theoretical paper not specifying a country, modeling fundraising for a new business).

In the model of this paper, the side running the business knows the quality of their business, but outsiders cannot distinguish it. Consequently, the value the market assigns has no choice but to adjust to an average mixing good businesses and bad businesses. The side with a bad business can hand it over to a market that does not know the situation, leaving almost none of their own stake behind. Therefore, if bad businesses increase and lower the average, situations arise where even businesses worthy of funding cannot secure money.

Because of hidden characteristics that only the selling side knows and the buying side does not, only the bad side remains in the market—this is called adverse selection. If only the person selling a used car knows its condition, the owner of a good car leaves because they cannot get a fair price, and only bad cars remain.

In the same paper, times when a market may fail to form at all are when the difference in information is large and bad businesses appear more frequently than good ones. As a solution, this paper looks at actions. Because whether insiders are trying to put their own money into that business is also visible from the outside, that action becomes a signal of quality. Conversely, if the insider trying to pass something to the outside leaves almost none of their own stake behind, that is not a good signal. However, the authors write that the state (equilibrium) where values settle through such signals might not arise, might not be maintained, or might not be economically efficient.

Applying this framework to capital increases is explained as follows. A company stepping forward to sell more slices is an action where the side that knows the company's situation best will receive new money. Therefore, outsiders can suspect whether insiders currently see the stock price as higher than the company's situation, and in this explanation, that suspicion is reflected in the price. However, this is an explanatory framework, and the Korean studies cited in this article did not directly measure this link.

This framework is also applied to capital increase disclosures in Korea. The background underlying a paper dealing with capital increase disclosures of domestic listed companies is that market reactions to capital increase disclosures are predominantly negative due to adverse selection caused by information asymmetry between inside and outside the company (DOI: 10.35527/kfedoi.2026.25.2.005 · companies listed on the KOSPI and KOSDAQ markets from 2010 to 2024). This paper views patents as a signal that communicates the value of a company's technology to the outside. In the analysis, the mere fact of holding patents had no significant direct effect on reactions, but when patents and information transparency went together, reactions improved significantly.

In Korea, public disclosures stating that more slices would be sold were on average received negatively, but their magnitude and sign differed depending on the method and period. The authors of the 3,161 cases read that reaction as information about financial health, and the 2026 paper points to information asymmetry between the inside and outside of the company in its background.

Why Companies Sell More Shares

There are broadly three ways a company can raise money: using money it has earned, borrowing, and creating and selling more shares.

The theories explaining the choice among those three are broadly two (DOI: 10.3386/w1393 · NBER working paper, a theoretical summary not specific to any country).

The first theory weighs the pros and cons of debt. Because the interest on borrowed money is deducted from profits before taxes are applied, borrowing reduces taxes. However, borrowing too much makes the company wobble with the risk of not being able to repay, and that too is a cost. It posits that there is an optimal debt ratio at the point where this tax advantage and the cost of wobbling offset each other.

The second theory speaks of an order. A company spends its earned money before outside money, and if it needs to secure funds from the outside, it uses borrowing before shares. This is the pecking order theory, and here shares are the last resort. The same working paper notes that this order emerges from a simple model dealing with the information gap between the inside and outside of the company.

That order connects to the information gap from the previous section in this way. When using earned money, there is no need to ask anyone on the outside to price it. Because debt has a fixed repayment amount, its value fluctuates less even if people on the outside do not know the company's situation well. Because the value of shares changes directly depending on the company's situation, they receive the greatest suspicion from the outside.

When the room to borrow more—in other words, debt capacity—does not need to be worried about, borrowing appears to be chosen before shares. Raising money with new shares by listed companies is explained in large part by worries about that capacity (DOI: 10.1017/s0022109010000499 · English academic journal, the abstract does not disclose the sample's country). This means that shares are sold when having to worry about borrowing more arises. The authors note that when taking that capacity into account, the pecking order theory explains financing behavior well over a long period in a large sample.

In Korean data, the time horizon for which money was needed divided the choice. There was a tendency to choose borrowing for immediate outlays and shares for cash demands lasting a long time, and this tendency was clearer in companies conducting a lot of research and development (DOI: 10.32599/apjb.14.1.202303.215 · domestic listed companies). Companies belonging to large business groups that could circulate money within the company delayed securing money from the outside for near-term cash demands.

In the KOSDAQ market, the pecking order theory was only partially correct. The results were mixed, with both the claim of the first theory, which speaks of an optimal debt ratio, and the claim of the second theory, which speaks of an order, being partially supported (KCI ART001624125 · 762 KOSDAQ samples from 2000 to 2010).

There are companies in a state where they cannot even pay back all of their interest with earned money for three consecutive years. Companies that issued seasoned equity offerings had a high probability of being classified as such companies (DOI: 10.21073/kiar.2024..118.001 · 28,853 firm-years in the KOSPI and KOSDAQ markets from 2000 to 2023). In small and medium-sized enterprises, the relationship between seasoned equity offerings and this classification was weak. Among companies already in this state, those that increased their seasoned equity offering amount saw a decrease in bankruptcy risk. The authors read this as small and medium-sized enterprises finding it difficult to raise money trying to overcome financial crisis through seasoned equity offerings, and that actually leading to the effect of reducing bankruptcy risk.

The pecking order theory places shares as the last resort in the path of raising money. In Korean data, shares were chosen for long-lasting cash demands, and while companies that issued seasoned equity offerings had a high probability of being companies that struggled to pay interest, among such companies, those that increased their seasoned equity offering amount saw their bankruptcy risk decrease.

The Disclosure Day for a Holder of 10 Shares

A company with 100 shares issues a disclosure. It states that 20 new shares will be sold through a "rights offering with public offering of unsubscribed shares". Let us trace what happens next to me, a person holding 10 shares.

First, an opportunity comes to me to buy 2 new shares ahead of others at a set price. If I buy both, I hold 12 out of 120 shares, so my share remains exactly one-tenth, but I have put in more money equal to the price of 2 shares. If I do not buy them, I end up with 10 out of 120 shares, or one-twelfth, and my voting power shrinks in the same proportion. If I neither pass that opportunity to someone else nor use it, those 2 shares become unsubscribed shares and are opened to anyone.

The company treasury receives the payment for the 20 new shares, and the remaining cake at the end of the line is now divided among 120 shares. Whether the value per share grows or shrinks is determined by whether the money brought in by one new share is greater or smaller than the value contained in one original share.

Across 407 disclosures of this method, the three-day average reaction was minus 13.83%. Because this is an average compiled from 407 disclosures of a single method, it does not capture how any specific company will fare.

Whether my ratio remains one-tenth or shrinks to one-twelfth is decided by what I did with the 2 slots that came before me. The average reaction to the disclosure is separate from that, being a figure gathered from all disclosures of the same method.

Where to Look Next

Shares, lines of people, the tables attached to shares, and the claim on what is left over are covered in "What You Actually Own When You Own a Share — And Where You Stand in Line".

The ledgers you open to gauge the share's underlying claim from the outside are covered in "Financial Statements — What Each of the Three Ledgers Is Asking", and how far those books can be trusted is covered in "How Far Can the Books Be Trusted — Where Discretion Ends, and Whether Reading Them Puts You Ahead".

Whether the market properly reflects this information in prices is handled by "Can You Beat the Market?", while looking at adverse selection alongside externalities and monopolies falls to "When Markets Fail". Where the money comes from when a company chooses to borrow is covered in "Where Money Comes From".

Source Papers

• "A Study on the Discount Rate, Issue Price, and Subscription Rate of Rights Offerings via Shareholder Allocation" (2022) — DOI: 10.26845/KJFS.2022.04.51.2.177 — 407 cases of "rights offering with public offering of forfeited shares" between 2004 and 2016: 3-day CAR around the initial announcement was −13.83%, and around the final issue price announcement was −4.85% (regardless of the increase or decrease in the issue price, and delays made it more negative). Shareholder wealth depends heavily on the discount rate, which is interpreted to mean that the discount rate conveys information about future prospects; the smaller the information asymmetry and the higher the controlling shareholder ownership, the smaller the discount rate. The forfeited share ratio was about 14%, and wealth transfers due to forfeited shares amounted to 7.08% of the raised amount (direction not specified). The longer the procedure period, the lower the subscription rate, and the preemptive rights certificate listing system significantly increased the subscription rate. It concludes that since the value drop is not much different from the actual amount raised, firms should carefully consider multiple financing alternatives before shareholder allocation.
• "A Reconsideration of the Announcement Effects of Seasoned Equity Offerings" (2016) — KCI ART002092031 — 3,161 initial announcements between 1991 and 2013 (regardless of method): 3-day CAR was −3.69%, flipping signs from +1.56% in the first half (1991–2001) to −6.56% in the second half (2002–2013). Issuing firms in the second half were financially distressed firms with low operating performance, low operating cash flow, and high debt-to-equity ratios, and the ratio of capital expenditures and research and development out of the raised funds was also significantly lower. The authors interpret that equity offering announcements convey information that the firm is financially distressed, causing the stock price to drop.
• "Seasoned Equity Offerings in Korean Firms: Size and Motives of Cash Savings" (2022) — KCI ART002876378 — Domestic listed firms hold an average of 36.5% of the seasoned equity offering amount in cash in the same year, and their cash ratio in that year increases significantly. The growth support hypothesis and precautionary cash-holding motive hypothesis were supported, while the market timing hypothesis—stating that offerings trying to exploit overvaluation have a higher cash savings rate—was not supported.
• "An Empirical Study on the Relationship Between Announcement Effects of Seasoned Equity Offerings and Operating/Financial Leverage" (2022) — DOI: 10.21737/RAPS.2022.11.27.4.95 — KOSPI and KOSDAQ listed firms from 2014 to 2021: announcements of shareholder allocation showed negative announcement effects, while announcements of third-party allocation showed positive ones. The authors write that third-party allocation is perceived as a positive event and thus utilized by many firms, and regulations should be improved by considering the characteristics of each method.
• "INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION" (1977) — DOI: 10.1111/j.1540-6261.1977.tb03277.x — Under informational asymmetries in financial markets, market value has no choice but to reflect average business quality, and when the difference in information is large and the supply of bad businesses is large, markets may fail to form. The willingness of insiders to invest in their own business serves as a quality signal, but signaling equilibria may not exist, may not be maintained, or may not be efficient (theoretical paper, venture financing model).
• "The Impact of Corporate Innovation and Information Transparency on the Announcement Effect of Seasoned Equity Offerings" (2026) — DOI: 10.35527/kfedoi.2026.25.2.005 — KOSPI and KOSDAQ announcements from 2010 to 2024: against the backdrop where market reactions are predominantly negative due to adverse selection from information asymmetry, the direct effect of patent ownership itself was not significant, while the interaction between patents and information transparency showed a significant positive (+) effect on CAR.
• "Capital Structure Puzzle" (1984) — DOI: 10.3386/w1393 — Pits the static tradeoff theory against the pecking order theory. The former views the point where the tax benefits of debt and financial distress costs balance at the margin as optimal, whereas the latter views firms as preferring internal funds over external funds, and debt over equity if external funds are needed. Sequential behavior emerges from a simple asymmetric information model (NBER working paper).
• "Debt Capacity and Tests of Capital Structure Theories" (2010) — DOI: 10.1017/s0022109010000499 — When debt capacity concerns are absent, debt appears to be preferred over equity among external funds, and new external equity financing by listed firms is largely explained by debt capacity concerns. When debt capacity is taken into account, the pecking order theory explains financing behavior well over large samples spanning long periods (abstract does not specify sample countries).
• "The Impact of Cash Shortages on External Capital Raising Decisions" (2023) — DOI: 10.32599/apjb.14.1.202303.215 — Domestic listed firms: tended to issue debt for immediate expenditures and equity for longer-lasting cash needs, a tendency more pronounced in R&D-intensive firms. Large business groups with internal capital markets postponed external financing for immediate and near-term cash needs.
• "Determinants of Capital Structure in KOSDAQ Firms" (2011) — KCI ART001624125 — 762 KOSDAQ samples from 2000 to 2010: mixed results where claims of the static tradeoff theory were partly supported, but the pecking order theory was also partly supported.
• "A Study on the Prior Signs of Vulnerable Firms: Focusing on Seasoned Equity Offerings" (2024) — DOI: 10.21073/kiar.2024..118.001 — 28,853 firm-years on KOSPI and KOSDAQ from 2000 to 2023: firms conducting seasoned equity offerings were likely to be classified as vulnerable firms with an interest coverage ratio below 1 for 3 consecutive years, though the relationship was weaker in small and medium-sized enterprises, and vulnerable firms that increased their offering amount saw a reduced risk of bankruptcy. The authors interpret that small and medium-sized enterprises facing difficulties in raising funds try to break through crises with equity offerings, which leads to a reduced risk of bankruptcy.