Why might a firm consider raising equity via a rights offering rather than via a general cash offer? What are the disadvantages? If you are a stockholder in the firm, which would you prefer?

The major advantage to the firm with a rights offering is the lower level of flotation costs, which can result in especially significant savings if an underwriter is not employed. Arguments against using rights include: 1. underwriters increase the stock price, 2. underwriters provide insurance against failed offerings, 3. the proceeds from a cash offer will be available sooner than with a rights offer, 4. underwriters provide a wider distribution of ownership, and 5. consulting advice from underwriters may be beneficial. None of these provides a complete explanation for why rights offerings are used so little in Canada. As for the shareholder, a rights offer causes no financial harm unless the shareholder fails to exercise or sell their rights. The shareholder benefits due to the lower issuance costs for the firm, along with the right to protect their proportionate ownership interest in the firm.