Lower boundary violations and market efficiency: Evidence from the Swedish subscription rights market:

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The purpose of this thesis is to study the market efficiency of the Swedish market for subscription rights between 1993 and 2006. Very few studies have examined the market for rights issues and no study has attempted to provide explanations for market inefficiency evidence of these markets. We use ex-post and ex-ante tests of lower-boundary violations in order to test the weak form market efficiency. Our main findings are that the Swedish market for subscription rights is characterized by remarkable arbitrage opportunities. Even after considering transaction costs and other frictions such as the bid-ask spread and allowing for one day execution lag, the profit opportunities are not eliminated, not even for the individual investor. However, this market is characterized by poor liquidity, and therefore the role of liquidity for the violation of the boundary conditions is examined by regression analysis. The results indicate that liquidity risk is a considerable obstacle to the role...