| This paper first explores a theoretical analysis for the equity financing decisionsof listed companies in China, and then empirically tests the implications from thetheoretical model using data of A-Share companies.Employing the "Value Model" proposed by Chen and Chen (2005), theoreticalanalysis indicates that when there is pricing bubble in China capital market, the equityfinancing decisions of listed companies could be driven by both value objective andmoney encirclement objective. And the low quality companies have a very strongincentive to use equity financing. In addition, the financing incentive of lower qualitycompanies is usually stronger than that of higher quality companies. The theoreticalanalysis offers abundant implications for the empirical tests. Since lower qualitycompanies have a stronger incentive to implement large scale financing, it results inthe deterioration of financial performance and the inefficiency of utilizing their IPOproceeds.Following the theoretical analysis, this paper further tests the economicconsequences and the resource allocation of equity financing. Empirical results showa post-IPO "face-off phenomenon". That is, firms with greater equity financing aremore likely to experience the face-off phenomenon. Moreover, companies with moreequity financing tend to invest less IPO proceeds. The seasoned equity financing andleverage also have a significant influence on the investment of IPO proceeds. Thisfinding indicates that the utilization of IPO proceeds is motivated by the moneyencirclement incentive. Finally, this paper documents that firms with lowerinvestment of IPO proceeds are more likely to have poor financial performancerelative to those firms with higher investment. But no evidence shows that the firmsthat alternate investing their IPO proceeds significantly lower their profitability. Insum, the empirical findings are consistent with the theoretical arguments.
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