Preemptive rights as a stockholder
Is there any advantage to having preemptive rights as a stockholder? Is there any disadvantage?
There are two advantages to a corporation’s stockholders of having preemptive rights. The primary advantage is the ability to maintain a proportional ownership of the corporation should it issue additional shares of common stock in order to maintain control. In addition, it is less costly to issue new shares to existing shareholders than to new shareholders since the services of an investment banker are not required. This lowers the company’s cost of equity, and hence its cost of capital, increasing the firm’s value. Management can keep this extra value within the company or can distribute it to shareholders in the form of a discounted price on the newly issued shares (in which case the rights may be used or sold to other investors for their cash value). There is no particular disadvantage to preemptive rights other than that a stockholder who elects to use them to purchase additional shares must come up with the necessary amount of cash.