LAYOFFS AND UNDERWRITTEN RIGHTS OFFERS

In seasoned equity rights offers, the standby underwriting contract re sembles the sale of a put option. In the rights offering period, under writers reduce their exposure to the standby underwriting by purchasin g rights hedged with short sale of the common stock. Consistent with E ckbo and Masulis (1992), offers with large rights sell-offs during the offering period experience significant price decline. The offering pe riod price decline and the nature of constraints confronting underwrit ers may partially explain the preference for general public offers.