Private Placement of Public Equity in China by Pengcheng Song

By Pengcheng Song

By retrieving entries from the financial-data seller Wind and gathering correct info from inner most placement statements, the writer builds a proprietary database and reviews 5 facets of non-public placement in China. He examines which indexed businesses usually tend to decide on inner most placement over website positioning in refinancing; he appears into the controlling shareholder’s selection on even if to buy privately put stocks; he investigates how the provide is set; he calculates declaration classes for irregular returns on deepest placements. the place the irregular go back is considerably confident, he files confident long-run irregular go back on deepest choices and facts assisting the under-reaction speculation. eventually, he concludes that the most important shareholders tunnel through extra rate reductions from which they profit yet that's damaging to different shareholders.

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Extra resources for Private Placement of Public Equity in China

Example text

Firm management would give up investment opportunities of positive NPV rather than raising additional funds through equity offering, a phenomenon called underinvestment. However, if firm management is able to signal to the market true value of the firm with a low cost, or if outside investors are capable of evaluating intrinsic value of the firm, then the underinvestment problem can be effectively solved. Eckbo and Masulis (1992) show that by employing an underwriter, a firm conducting rights offering sends to the market a signal that firm value is justified.

As information asymmetry on firm value becomes more severe, neither rights offering nor SEO is able to solve the underinvestment problem. As Hertzel and Smith (1993) first point out, private placement becomes a feasible choice for firms wanting additional financing but facing greater information asymmetry problem. The analysis above applies to China’s equity raising practice too. If information asymmetry on firm value is relatively moderate, it is easier to make small investors participate in a public offering of the firm.

Evidence from private placements. J Finan Intermediation 14:210–238 La Porta R, Lopez-De-Silanes Florencio, Shleifer A (1999) Corporate ownership around the world. J Finan 54:471–517 Li D, Lu Z (2010) Does q-theory with investment frictions explain anomalies in the cross section of returns. J Finan Econ 98:297–314 Loughran T, Ritter JR (1995) The new issues puzzle. J Finan 50:23–51 Loughran T, Ritter J (1997) The operating performance of firms conducting seasoned equity offerings. J Finan 52:1823–1850 Marciukaityte D, Szewczyk SH, Varma R (2005) Investor overoptimism and private equity placements.

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