| Title | Private placement of public equity in China as a channel of tunneling and its wealth effects |
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| Authors | Song, Pengcheng.
宋鹏程. |
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| Issue Date | 2012 |
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| Publisher | The University of Hong Kong (Pokfulam, Hong Kong) |
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| Abstract | Private placement of public equity is dominating SEO and rights offering in
China’s equity refinancing practice, but has been scarcely studied. By retrieving
entries from financial data vendor Wind and collecting relevant data from reading
statements of private placements, I build a proprietary database and study five
aspects of private placement in China. Firstly I study which listed firms are more
likely to choose private placement over SEO in refinancing. Firms whose
controlling shareholder is state-owned and who want to establish business
connections with potential investors are the most likely to conduct private
placement. Secondly I look into the controlling shareholder’s decision whether to
purchase privately placed shares or not. The controlling shareholder does not care
about holdings dilution caused by not participating in a private placement. No
matter how severe information asymmetry is on the issuer’s true value, there are
always institutional investors contributing capital to it, so its largest shareholder
does not have to participate in the offering for the sake of solving underinvestment
problem. Thirdly I investigate how the offer discount is determined.
China’s private placements are sold to investors at an average discount of 24.83%.
Such discount does not reflect the largest shareholder or institutional investors
increased monitoring efforts after the placement. There is also no consistent
evidence that information costs explain the discount. In private placements where
the largest shareholder buys shares, however, the discount is as high as 43.16%.
Fourthly I calculate announcement period abnormal return of private placements.
The abnormal return is significantly positive. Again, increased monitoring from
the largest shareholder or big institutional investors does not explain the
positivity. There is mixed evidence whether reduction of information asymmetry
causes positive announcement-period abnormal return and inadequate evidence
whether more credible information leads to higher market reaction. Fifthly but not
finally, I document positive long-run abnormal return of private offerings,
evidence supportive of the under-reaction hypothesis. All these adventure
indicates that the largest shareholder does not deserve the excess discount in the
placement. The largest shareholder can ask for a lower price than institutional
investors’ for longer locking period of private shares, but it does not, showing that
liquidity is not a concern of it. It does not have to contribute capital to the issuer
for under-subscription of shares, because no matter how uncertain firm value is,
institutional investors are willing to dedicate enough proceeds. Thus information
asymmetry is no problem for the largest shareholder either. Positive long-run
abnormal return also does not justify the excess discount. I argue that the largest
shareholder tunnels by excess discount, rational of itself but harmful to other
shareholders. |
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| Degree | Doctor of Philosophy |
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| Subject | Private investments in public equity - China. |
|---|
| Dept/Program | Economics and Finance |
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| DC Field | Value |
|---|
| dc.contributor.author | Song, Pengcheng. |
|---|
| dc.contributor.author | 宋鹏程. |
|---|
| dc.date.hkucongregation | 2012 |
|---|
| dc.date.issued | 2012 |
|---|
| dc.description.abstract | Private placement of public equity is dominating SEO and rights offering in
China’s equity refinancing practice, but has been scarcely studied. By retrieving
entries from financial data vendor Wind and collecting relevant data from reading
statements of private placements, I build a proprietary database and study five
aspects of private placement in China. Firstly I study which listed firms are more
likely to choose private placement over SEO in refinancing. Firms whose
controlling shareholder is state-owned and who want to establish business
connections with potential investors are the most likely to conduct private
placement. Secondly I look into the controlling shareholder’s decision whether to
purchase privately placed shares or not. The controlling shareholder does not care
about holdings dilution caused by not participating in a private placement. No
matter how severe information asymmetry is on the issuer’s true value, there are
always institutional investors contributing capital to it, so its largest shareholder
does not have to participate in the offering for the sake of solving underinvestment
problem. Thirdly I investigate how the offer discount is determined.
China’s private placements are sold to investors at an average discount of 24.83%.
Such discount does not reflect the largest shareholder or institutional investors
increased monitoring efforts after the placement. There is also no consistent
evidence that information costs explain the discount. In private placements where
the largest shareholder buys shares, however, the discount is as high as 43.16%.
Fourthly I calculate announcement period abnormal return of private placements.
The abnormal return is significantly positive. Again, increased monitoring from
the largest shareholder or big institutional investors does not explain the
positivity. There is mixed evidence whether reduction of information asymmetry
causes positive announcement-period abnormal return and inadequate evidence
whether more credible information leads to higher market reaction. Fifthly but not
finally, I document positive long-run abnormal return of private offerings,
evidence supportive of the under-reaction hypothesis. All these adventure
indicates that the largest shareholder does not deserve the excess discount in the
placement. The largest shareholder can ask for a lower price than institutional
investors’ for longer locking period of private shares, but it does not, showing that
liquidity is not a concern of it. It does not have to contribute capital to the issuer
for under-subscription of shares, because no matter how uncertain firm value is,
institutional investors are willing to dedicate enough proceeds. Thus information
asymmetry is no problem for the largest shareholder either. Positive long-run
abnormal return also does not justify the excess discount. I argue that the largest
shareholder tunnels by excess discount, rational of itself but harmful to other
shareholders. |
|---|
| dc.description.nature | published_or_final_version |
|---|
| dc.description.thesisdiscipline | Economics and Finance |
|---|
| dc.description.thesislevel | doctoral |
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| dc.description.thesisname | Doctor of Philosophy |
|---|
| dc.identifier.hkul | b4786992 |
|---|
| dc.language | eng |
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| dc.publisher | The University of Hong Kong (Pokfulam, Hong Kong) |
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| dc.relation.ispartof | HKU Theses Online (HKUTO) |
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| dc.rights | The author retains all proprietary rights, (such as patent rights) and the right to use in future works. |
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| dc.rights | Creative Commons: Attribution 3.0 Hong Kong License |
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| dc.source.uri | http://hub.hku.hk/bib/B47869926 |
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| dc.subject.lcsh | Private investments in public equity - China. |
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| dc.title | Private placement of public equity in China as a channel of tunneling and its wealth effects |
|---|
| dc.type | PG_Thesis |
|---|
