Abstract
AbstractThis study examines stock market reaction to the announcement of various forms of seasoned issues in China. Our empirical evidence demonstrates that market reactions differ in ways that suggest a difference between management's internal assessment and the market's assessment of the stock price. The market responds unfavourably to the announcement, notably in the case of rights issues and also with regard to open offers. Private placements experience an unfavourable pre‐announcement reaction, which contrasts with the favourable reaction after the event. Convertible bond issues generate positive excess returns consistent with the market's confidence that they can help to align management and shareholders’ interests. Further investigation shows that market reaction is related to factors specific to the issuer and issue by reference to the period immediately surrounding the issue. Specifically, ownership concentration, agency matters connected with equity offerings, investor protection connected with fund allocation and security pricing, and the influence of powerful moneyed interests together provide an instructive insight into market reaction. Institutional inefficiency pertaining to underwriting, auditing, analysts’ forecasts and credit ratings are found to have a weak association with market price, consistent with due public scepticism concerning management and their gatekeepers.
Highlights
Previous studies have examined the firm’s financing decisions and the corresponding market price movements
Our results suggest that the MB ratio is not perceived as a credible signal of prospects of future investment, but rather as a measure of overvaluation and mispricing or a measure of market anomaly associated with agency costs on the part of inside parties
On the basis of credit rating reports issued by all qualified domestic credit rating agencies (CRAs), our results show that the ratings assigned by the CRAs do not convey any new information to the market about the credit risk of convertible bonds
Summary
Previous studies have examined the firm’s financing decisions and the corresponding market price movements. Our study examines a range of factors that explore ex-ante metrics determining the market’s perception about the value of the new issue, the issuerelated features driving idiosyncratic market reactions surrounding the announcement period, and those security-specific characteristics associated with individual forms of issuance which promise to illuminate operational arrangements, including management and monitoring matters. We find that ex-ante measures which reflect the market’s pre-announcement predictions of the value of the new issue – manifested in growth opportunities, price run-up and dividend distribution policy – feature significantly among the factors which are specific to the issuer and the type of security issuance Within this overall set of findings, ownership concentration causes value losses in the offerings of equity where agency problems are predominant, but such problems impinge less in the case of convertible bond issues, due to both inherent disciplines and stringent regulation of convertible bonds in China.
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