Research On The Motives And Consequences Of Altering The Use Of IPO Proceeds By China's A-share Listed Companies

One of the basic functions of a stock market is the allocation of financial resources. A stock market is a place where surplus capital is transferred from the public to enterprises which need the capital by means of issuing virtual security, thereby provides a facility to direct financing for enterprises. By this time, the first step of a stock market to allocate financial resources has been finished, and the next step for enterprises is to get use of this capital so as to enhance their intrinsic value. How the listed companies get use of their proceeds through issuance of common stock is of great importance to an economy to every extent:to that of micro-economy, it determines the inner power of the companies'self development, and comes to be the base for protection of investors' interests; to the extent of medium-economy, it determines whether the stock market's allocation function has any effect, and all the activities relevant to the use of financing capital is the core link of stock market activities; to the extent of macro-economy, it even relates to the rapid healthy development of the whole national economy.However, there arises a special phenomenon during the process of using the initial public offering proceeds, that is, the listed companies frequently altering the proclaimed use of IPO proceeds in great force. Is it a normal business decision which applies to the market changes, or some malicious financing at the background of distortion of stock market function? Is it the drive of the listed companies'profit promotion, or an aura of corporate performance? It is quite difficult to precisely answer all these questions. Massive alteration of proclaimed use of IPO proceeds is the specific manifestation of the behavioral laws of Chinese listed companies. With the development and improvement of capital market, it is of great theoretical and realistic meaning to explore and research the logic clue of such behavioral laws.Among current foreign literature, researches on the issue of the use of financing capital are mainly focused on over-investment, under-investment, abuse of free cash flows, the inefficient investment activities by companies, and the poor performance after issue of new stock. There are few researches on the issue of alteration of financing capital. As for domestic literature, researches on this issue usually involve the motives and consequences of the alteration behavior.The exploration about the motives of the alteration behavior is a field most researches are concentrated on. Cutting through different perspectives, relevant study investigates the main causes that initiate such alteration behavior using a method of either empirical study or normative study, which could be summarized into two viewpoints:one is that altering the proclaimed use of IPO proceeds has had a very bad impact upon market and the firm, and is subject to strict supervision; the other is that the behavior of altering the use of IPO proceeds is a natural response of listed firms to the changes of market conditions and the adjustment of macro-economic policies in their operation, which has its rationality, and should not be denied blindly.Researches on the effects of the alteration behavior on a firm are mainly focused upon two problems:one is the effects of the alteration behavior on corporate performances, the other is the market responses to such behavior. All the study about market response to the alteration behavior has applied the event-study methodology, but resulted in two conclusions that are poles apart. The divergence lies in two levels:the first one is whether the stock market gives any response to the alteration behavior, which is an important basis for judgment of a market's efficiency; the second one is whether the market response is positive or negative, which is an important basis for judgment of investors' rationality. As for the effects of the alteration behavior to corporate performances, current literature involves both empirical and normative study. Most of the empirical study about this issue takes financial ratios as the dependant variables using the accounting research method, and results in two different conclusions as well:one is that the alteration behavior reduces corporate performances, the other is that it enhances them.Current literature about the alteration of proclaimed use of IPO proceeds covers each aspect of this issue including its motives and effects, which could be considered as comprehensive. But there exists some deficiencies in these achievements. Firstly, current researches on the issue of altering the use of IPO proceeds are static and isolated. Those normative researches in current literature simply consider all types of alteration behaviors as of same quality, and consider "altering or not altering" as the judgment for a good or bad listed company; as for empirical researches, either the listed company data used in those researches covers only 1 to 3 years, or only some specific cases are used, which are all lacking in explanatory power. Secondly, there is a lack of a clear clue in current exploration about the issue of altering the use of IPO proceeds lack. Current researches haven't made a further investigation into the inner connections among the many market dealers including the listed companies, controlling shareholder, public investors and supervision department and the roles they respectively play. In view of these deficiencies, this paper intends to provide an overall data of the alteration behavior and a logic clue running through the whole study.This paper takes all the companies that have conducted IPO in the stock market and have altered the proclaimed use the IPO proceeds during 1990 to 2009 as studying object, shows the alteration behaviors since the establishment of the Chinese stock markets from multiple perspectives, and makes empirical researches on the motives to the alteration behavior and the results on the corporation performance. According the definition of the behavior of altering the use of IPO proceeds and the standards by which the data is collected, there are 538 listed companies that have ever altered the proclaimed use IPO proceeds, which are confirmed as primary studying sample. Empirical researches in this paper include:(1) the co-relationship between the alteration behavior and different corporate governance mechanisms; (2) the co-relationship between the alteration behavior and preference by management to equity financing and that by investors to certain assets; (3) how does the stock market responses to the behavior of altering use of proceeds by listed companies; (4) what impacts the behavior of altering use of proceeds by listed companies have upon the corporate performance.Through theoretical analysis and quantitative study, this paper has got some achievements:1. As for the institutional and non-institutional incentives of the alteration of proclaimed use of IPO proceeds, this paper explains as follows:No matter examined from a historical perspective or through horizontal comparisons among different countries, current securities issue auditing system exhibits an apparent government- oriented characteristic, which results in a state of short supply of stocks on the part of both total quantity and supply structure. Together with the projects-oriented characteristic, current system obviously encourages enterprises that are intended to issue stocks to make decision merely on account of the possible projects in the contests for the issuing qualifications, which comes to be an ex ante incentive mechanism to the alteration behavior that is strengthened. After the alteration of use of IPO proceeds, the invalidation of punishment mechanism of the supervision department from outside the altering companies and the deletion of litigation mechanism for minor shareholders from inside the altering companies display an ex post constraint mechanism to the alteration behavior that is weakened. The strengthened ex ante incentive mechanism and the weakened ex post constraint mechanism are just the institutional roots for the massive alteration of proclaimed use of IPO proceeds.In Chinese financial markets, the costs for equity financing are quite low, which provides an incentive from outside for the management to collect capital by equity. Meanwhile, the constraints of free cash flows derived from equity financing is almost zero, which provides an incentive from inside that enhances the management's preference for equity financing. The craving for capital by firms and the preference for equity financing by managers, encountered with the institutional strengthened incentives and weakened constraints, expedites the behavior of altering the proclaimed use of proceeds. At the same time, investors have a preference for the projected investment, which is manifested as the "single-asset preference" resulted from information asymmetry and "investment selection preference" derived from macro-economic policies; the listed companies choose to satisfy investors'preference when they prepare for the prospectus before IPOs, so as to guarantee a successful issurance and a high offering price, and alter the proclaimed use in the prospectus after they finish IPOs. As the main participants of stock market, the preferences of managers and investors result in a non-institutionsl strengthened incentive to the altering behavior, while the defects of interal and external corporate governance mechanism become the manifestation of a non-institutional weakened constraint.2. As for the motivation and consequences of the alteration behavior, this paper draws the following conclusions through empirical study:By logistic regression and multiple linear regression this paper discovers that, the probability and degree of the altering behaviors are negatively related to the listed companies'corporate governance level. As the main components of corporate governance mechanism, the ownership structure, property structure, proporation of independent directors, issuance of B share and H share, as well as the transition of corporate control power are all significantly correlated to the probability and degree of the altering behaviors.By factor analysis, this paper summarizes those influential factors as cost factor, debt factor, free cash flow factor and diversification factor. The results of multiple linear regression show that cost factor, debt factor and diversification factor are significantly correlated to the probability and degree of the altering behaviors.By event study, this paper draws the following conclusions:the behavior of altering the proclaimed use of IPO procceds doen not induce a violent reaction by the market investors, which shows that investors do not pay much concern to such behaviors. However, such behaviors result in an abnormal return by the investors, that is to say, the market does not "punish" the companies for their altering behaviors but consider the altering event as aome valuable information.By factor analysis, this paper converts a series of financial ratios to a comprehensive score, based on which some studies on the changes before and after the altering events are carried out, and draws the following conclusions:Corporate performance before the altering events are lower than that after the events, which shows that companies with a poorer performance tend to alter use of IPO proceeds. Altering the use of IPO proceeds does improve the overall performance, although it is not statistically significant.There are three main innovations in this pape:The first is the innovation on the part of the datas. Current researches use data of a certain period of time or that of a certain industry, which is lack of convincingness. This paper use a data from 1990 to 2009, which covers all the listed companies, and gives a much more complete description of the altering behavior.The second is the innovation on the perspective. In general, this paper follows a logic clue of "cause and result". In the study of incentives of the altering behaviors, it follows a clue of "ex ante and ex post". In the study of consequences of the altering behaviors, it follows a clue of "short-term and long-term". These are different from previous researches.The third is the innovation on the methodology. In the researches of relationship between corporate events and corporate performances, current literatures usually apply a singe financial ratio as the measurement of corporate performance, while this paper chooses 12 financial ratios reflecting corporates'activities, leverages and profitabilities, constructs a comprehensive score used as the measurement of corporate performance. As part of the study on financing and investment of Chinese listed companies, the behavior of altering the proclaimed use of IPO proceeds involves plenty of specific problems, which are not completely covered in this paper, such as the altering behaviors in SEOs, supervision of the altering behaviors, altering events that involve related parties, etc. These are all included in the subsequent research plan of this paper.