Competitor Firms’ Stock-Price Reaction to Private Equity Placement Announcements: Evidence from China

Abstract

Private equity funds have taken a strong position in Chinese equity market particularly after the Chinese Security Regulatory Commission started regulating private equity placements (PEP) in 2006. We investigate impact of market reaction to the announcements of the PEP application, withdrawal, rejection, approval, and completion, while examining the cross-sectional differences of the market performance of competitor firms in the industry both in the short and long run. We find that competitors experience a decrease in stock prices in response to the announcements of application, approval, and completion of PEPs and increase in stock prices around the announcements of withdrawal or rejection of applications, suggesting the existence of competitive effects in the short-run. Competitors experience an increase in the long-term stock performance following private placements while also being consistent with competitive effects in the long-run.