On the effects of dilutive capital raisings

I know that musky has already thoroughly answered this question in the thread but i thought i would add my own perspective. Then, by the time i'd finished writing it out, it was an enormous page-long essay which was not even remotely on-topic for that thread anymore, so I decided to make a new thread for it.

I'm going to describe the relationship between capital raisings, value, and percieved value in as unambiguous terms as i can manage. "Unambiguous" often ends up borrowing from "mathematical" so forgive me when i start assigning letters to numbers, it is simply my nature. I have done my best to make it easily understandable by anybody, but I doubt I could explain it any other way. Anyway, on with it.

Something one might be forgiven for thinking is that a capital raising shouldn't affect the share price at all, because while you own less of the company, that same company has a BUNCH more cash than it did before. So it should all balance out, right? Well, yes, it should actually, if the market was perfectly well-informed. But that is not the case.

According to the efficient market hypothesis (a hypothesis which is completely wrong BTW, but I bring it up because it represents a very powerful way of thinking about the market) a capital raising shouldn't affect shareholders very much at all because the need for more capital is (theoretically) predictable from a combination of the cashflow statements and the distance of the product from profitability. Therefore the need for future capital should already have been priced into the share prior to the raising and it should have no material effect on the share price. But in practice, a capital raising for cashflow is almost always followed by a sustained decline in share price. I will explain the source of this disconnect after defining some terms.

Incidentally, this fact alone (meaning, the fact that CRs cause the SP to go down) should be enough to convince you that the efficient market hypothesis is nothing more than a powerful thought experiment, much like schrodinger's cat. Though an excellent tool to help you think, it ultimately has no power in the real world and should DEFINITELY never be USED in matters concerning the real world.

Back to the explaining. Now, every holder and potential holder has (or, I surely hope they have) a valuation in their own mind of what the ADAPT business segment is worth. This number will be different for every person, but will not change with the capital raisings so we can think of it as a constant in the upcoming example. Lets call this value V, for "Valuation".

Other than the valuation of the business segment itself, there is one other number that decides the value of a share in the eye of a buyer, is the buyers expectation of how much ownership of the business segment the share will entitle them to when the business segment reaches profitability. So that we don't have to fiddle with differences in shares on issue, lets represent this as two separate numbers: lets call them D (for "expected dilution") and S (for "shares on issue"). The expected "ownership at profitability" per share is defined by:
(1/S) * D = some fraction of the company
where D is a number between 0 and 1 representing how much of the business segment one share will own when the segment reaches profitability, compared to how much one share owns right now.
So a D of 1 represents no change in ownership, or "No dilution".
A D value of 0.5 would represent that a share today would own half as much by the time of profitability, also known as "50% dilution".

If we combine this with our valuation of the business segment we get the buyers valuation per share:

buyers perception of value of a share in the business segment = V x (1/S) x D
= VD/S

where, to recap:
V = Buyers valuation of the business segment
D = Buyers expectation of dilution
S = Shares on issue at time of valuation

Every time a capital raising is announced, people who had a D value of 1 or close to 1 (ie. people who were expecting no additional placements outside maybe some ESOP shares) are forced to revise their valuation of the shares, because reality has shown them that their expectation for D was wrong.

In their new valuation, the value of the business segment V is always higher (because the business now has all that extra money!), but so is the number of shares on issue. For the people who were wrong about D, we can deduce that even though their valuation of the business segment will now be higher, their new per-share valuation will ALWAYS be LOWER than their valuation before the capital raising if they are a current holder, due to one simple fact, which deserves its own paragraph:

"People who own the share do so because they value the companys shares at a higher price than the market price, and subsequently the raising price. Therefore the cash received by the business will always be worth less, according to the holders valuation, than the amount of ownership sacrificed to raise it."

The only people for whom a capital raising will cause an UPWARDS revision of their per-share valuation, are people who consider the share to be worth less than the raising price, and that upwards revision can only ever approach the raising price, not exceed it, so these upward revisions cannot contribute to raising the SP above the raising price (though they may have some minor power to add support)

This is why capital raisings for cashflow always have a negative impact on the share price.
Q.E.D.

Thanks for reading