Private placement of public equity in China as a channel of tunneling and its wealth effects

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.published_or_final_versionEconomics and FinanceDoctoralDoctor of Philosoph