A Study on Chinese Seasoned Equity Offerings, Information Asymmetry and Regulatory Issues
|School||Huazhong University of Science and Technology|
|Keywords||Seasoned Equity Offerings Regulations Information Asymmetry Investment Opportunities Pricing Effects|
After launching the initial public offerings (IPOs) the repeated public offerings by the firms are called seasoned equity offerings. Seasoned equity offering is widely adopted method to get finance from external resources and primarily conducted as right offerings (ROs), private equity placements (PIPEs) and public offerings (SEOs). All over the world studies on seasoned equity offerings reports that public offerings are accompanied with negative market reaction on their announcements. In US the reported decline on announcement of public offerings is 2.5%. One of the major causes which reported is information asymmetry between the firm and outside investors. In order to minimize the negative response on announcement of public offerings firms take different actions in order to signal the market about the performance of firm, which results reduction in the level of information asymmetry. Furthermore, in controlled economies governments also intervene by imposing different laws and regulations on equity markets.In China, China’s Securities Regulatory Commission is being imposing from time to time different laws and regulations on equity issues in order to limit the supply of shares. In rest of the markets, announcement effects of seasoned equity offerings are analyzed around one announcement date, however in China several different announcement dates are available i.e. board of directors meeting date, shareholders’meeting date, CSRC approval date, announcement date and issuance date, this is due to reason that a lengthy procedure to issue the equity is adopted by CSRC as compared to other countries of world. These regulatory measures give rise to a lot of questions which are of interest of investors.The Gaps which I have found in existing literature and this dissertation deals with are: The comprehensive study on behavior of market on the announcement of seasoned equity around these announcement dates, which is the most significant date involved in equity issue process, what is the reason for abnormal response on announcement, either problem of information asymmetry is resolved by involving a lengthy process of equity issue, what are the effects of regulations imposed by CSRC on seasoned equity offering firms, especially the growth firms. In addition private placements were introduced in China in 2006. Till now I don’t find any study on announcement effects of PIPEs around different announcement dates also what are the causes for their abnormal returns.Using an event study methodology to capture the abnormal returns around the announcement of equity issues, I find that China stock market respond more negatively to the announcement of right issues as compared to Public offerings and private placements. While analyzing the behavior of market during the public offering issue process, I find that it is accompanied with negative market reaction. The highest negative response is observed on the issuance day after that next significant date is board of directors meeting date and announcement date. When I try to find out the reason for this, the results support the hypothesis that on announcement dates the negative response is due to information asymmetry while on issuance date it is due to selling pressure exerted by the supply of shares in market. Further in order to investigate that either this lengthy process of issuing equity could help to reduce the information asymmetry by providing information on different times during issue process, I find that the information asymmetry is resolved around subsequent announcement dates of public offerings i.e. BOD meeting date, shareholders meeting date, CSRC approval and public announcement dates). In addition the study also finds that the regulatory measure taken by CSRC in order to limit the supply of share are up to some extend succeeded in reducing the level of information asymmetry by providing the internal accounting information of firms to market. I also find that after 2002 accounting based regulations growth firms are better able to signal market about the availability of investment projects this cause a reduction in their adverse announcement effects.As for as market response on the announcement of right issue is concerned, highly negative market response is observed on ex-right date. This study finds that small size of equity raised convey negative signal to the market about the non availability of investment projects hence cause a price drop, in addition higher Market to book value aslo negatively related to announcment period abnormal returns, which shows that investors are aware of the fact that firms show window dressing in their financial statements in order to get approval from CSRC to issue right shares. Finally, announcement effects of private placements (PIPEs) are found highly positive especially on BOD meeting date when highest positive response is observed. One of the reasons for highly positive response is that market considers that the PIPEs issuing firms are of good quality because PIPEs are sold to high net worth investors who have capabilities to analyze the value of firm, so if the value of firm is not good they will not invest. That is why only strong firms issue equity through PIPEs. Further, I found support for pricing effects. Those firms who issue PIPEs at premium faced significantly more positive price run up as compared to those who issue at discount. In addition to pricing effects I also find support for investment opportunity hypothesis. The larger the scale of the PIPEs issues, the more positive is the news about the firm’s prospects.Overall the findings of this study show that lengthy procedure to issue equity and the accounting based regulation could help to avoid the adverse response of market on one specific announcement day by developing the investors’confidence about the value of firm, also with the passage of time during the issue process market comes to know about the value of issuing firms. But these regulations should be properly scrutinized because in developed capital markets where the investors are more informed if window dressing of financial statements occurred to fulfill the regulatory restriction it could create the adverse effects.