The true relationship between capital increases and stock prices: Analyzing Tesla and TSMC to understand the rise and fall logic

Many investors are concerned about one question: when a company announces a rights issue, will the stock price go up or down? This question seems simple, but there is no absolute answer. A rights issue itself cannot guarantee a rise in stock price, nor does it necessarily lead to a decline. The actual outcome depends on market perception, the company’s fundamentals, and investor confidence. Let’s analyze real cases and mechanisms to uncover the truth about the relationship between rights issues and stock prices.

Why Do Rights Issues Sometimes Boost Stock Prices and Sometimes Cause Them to Fall?

When a company announces a rights issue, the market faces three simultaneous changes:

First, the supply of new shares increases, which theoretically puts downward pressure on the stock price. When the number of shares in circulation rises and demand remains unchanged, the relative value per share may be diluted.

Second, the market evaluates the purpose of the capital increase. Is the company trying to rescue itself from difficulties or seize growth opportunities? Investor confidence at this moment determines the stock’s direction.

Third, existing shareholders’ ownership proportions change. If old shareholders do not subscribe proportionally to the new shares, their ownership percentage decreases, which can have a negative psychological impact.

Three Signals of Stock Price Decline: Warnings Behind Rights Issues

Stock prices often fall after a rights issue due to these three factors:

Oversupply and insufficient demand: When the issuance volume exceeds actual market demand, stock prices face significant pressure. Especially in a bearish market environment, excess supply of new shares can accelerate downward trends.

Lack of investor confidence: If the market doubts the purpose of the capital increase—believing the funds might be misused or that the company’s management set an unreasonable price—investors may sell or hold back. Such negative expectations often cause rapid declines in stock price.

Psychological impact of dilution: When existing shareholders’ ownership is diluted, even if the company’s prospects are good, investors may feel their interests are harmed. This psychological factor often influences stock prices more in the short term than fundamentals.

Three Drivers of Stock Price Appreciation: Conditions for Successful Rights Issues

Conversely, the following three situations can drive stock prices higher after a rights issue:

Strong market demand for new shares: When investors are eager to buy the stock, the issuance does not depress the price; instead, it supports the overall market trend. This often occurs when the company’s outlook is optimistic and industry conditions are booming.

Market approval of the capital increase plan: If the market believes the funds will bring tangible growth—such as expanding into new markets, developing new products, or enhancing competitiveness—stock prices will rise on optimistic future expectations.

Active participation and support from shareholders: When existing shareholders subscribe heavily or even oversubscribe to the new shares, it sends a strong signal: insiders are optimistic about the company’s prospects. This “vote with money” behavior often attracts more external investors, pushing up the stock price.

Successful Case: TSMC’s Rights Issue Stabilizes and Boosts Stock Price

End-of-2021 Rights Issue

On December 28, 2021, Taiwan’s TSMC announced a cash capital increase to raise funds for capacity expansion. The news was quickly and positively received—stock prices rose afterward.

Why was TSMC able to maintain or even increase its stock price after the rights issue? The key factors include:

1. High market recognition of TSMC. As the world’s leading foundry, TSMC’s operational stability and profitability are unquestioned. Investors have strong confidence in management.

2. Clear and promising use of funds. TSMC explicitly stated that the capital would be used to expand capacity to meet the growing global demand for chips. In the market environment at that time, this was widely regarded as a good investment decision.

3. Strong shareholder support. As a high-quality company, most existing shareholders were willing to subscribe to maintain their ownership proportion. This “vote with money” signaled strong confidence to the market.

As a result, although the rights issue technically increased share supply, market demand and optimistic expectations far outweighed the dilution effect, allowing the stock price to stay stable or rise.

Contrasting Case: Tesla’s 2020 Rights Issue Insights

How the Capital Increase Overcame Market Skepticism

In 2020, Tesla announced a rights issue, issuing about $2.75 billion worth of new shares at a price of $767 per share. Normally, such a large issuance would cause the stock to fall due to increased supply and dilution.

But what actually happened? The stock did not decline; it rose after the announcement. Why this “counterintuitive” phenomenon?

The answer lies in market expectations for Tesla. At that time, Tesla was extremely hot in the global electric vehicle market, and investors were full of imagination about its future. The capital raise signaled that Tesla had the capacity to raise substantial funds, and its global expansion plans would accelerate.

For many investors, this capital could help Tesla build new factories, capture market share, and solidify industry leadership—expectations that far exceeded short-term dilution concerns. Ultimately, the rights issue became a catalyst for stock price appreciation.

Weighing the Pros and Cons of Rights Issues: How Should Investors Judge?

Why Rights Issues Can Benefit a Company

Rapid fundraising for growth: Rights issues are a direct way for companies to raise large amounts of capital quickly. Compared to bank loans, they avoid interest costs.

Optimizing capital structure: Increasing equity can lower debt ratios, improve financial stability and credit ratings, which benefits future financing and reputation.

Signaling market confidence: Successfully conducting a rights issue indicates investor trust, attracting more capital and talent.

Potential Risks of Rights Issues

Dilution of shareholders’ equity: The most direct cost. If the issuance price is low or existing shareholders do not subscribe fully, their ownership percentage decreases.

Market reaction uncertainty: Even with good use of funds, external factors can cause negative market reactions. Short-term stock price fluctuations are unpredictable.

Additional financing costs: Underwriting fees, listing review costs, etc., can add to expenses. If the issuance price is too low, it may undervalue the company.

How Investors Should Judge

When evaluating a company’s rights issue, consider:

• Is the purpose of the capital increase clear and strategic? Is the money for emergency needs or growth opportunities?

• Are the company’s fundamentals solid? Past profitability and industry position.

• What is the level of shareholder subscription? If insiders are unwilling to subscribe, it’s a warning sign.

• Is the issuance price reasonable? Too low may reflect lack of confidence.

• What is the overall market environment? Rights issues tend to succeed in bullish markets and struggle in bearish ones.

Timeline and Precautions for Receiving New Shares from Rights Issues

Investors who subscribe to rights issues need to understand when they will actually receive the new shares.

Timeline Factors

Company’s deadline: The company usually sets a specific deadline for subscription. Payment must be made before this date. Afterward, the company will process and allocate shares.

Exchange approval process: Rights issues require approval from the stock exchange, which can take several weeks to months, involving disclosure checks and compliance.

Shareholder registration: After approval, the company registers new shareholders’ information in its shareholder register.

Overall, from payment to receipt, it typically takes 1 to 3 months. During this period, stock prices may fluctuate, so investors should be confident in their decision.

Investment Advice

Rather than rushing to predict whether the stock price will rise or fall after the rights issue, investors should focus on assessing the company’s long-term fundamentals. The rights issue is just one financing tool; the key determinants of long-term stock performance are profitability, competitive advantage, and market outlook.

The cases of Tesla and TSMC show that when a company has a clear strategic plan, market confidence, and active shareholder support, a rights issue can become a catalyst for stock price growth. Conversely, if the company’s fundamentals are weak and market confidence is lacking, even without a rights issue, the stock may perform poorly.

Therefore, rational investors should learn to see through rights issues—evaluate the company’s true value—rather than be misled by short-term stock price fluctuations.