A Study On Market Timing In The Private Placements Of Listed Companies In China

The private placement of common stocks of listed companies has developed into themost prevalent financing way in China, and therefore has become a hot topic in theresearches on listed companies’ equity financing behavior. Existing studies are based onthe framework of traditional corporate finance theory and cannot fully explain the relatedphenomena of private placements in China. Based on the characteristics of Chinese stockmarket，this paper explores the market timing theory to examine listed companies’ privateplacements in China. This paper first analyzes the characteristics of the market timing inthe background of emerging capital market and security regulations, and identifies twotiming dimensions: timing on the valuation in the stock market and timing on the level ofsecurity regulations. Therefore, this paper first examines how these two dimensions oftiming affect listed companies’ decisions on whether to complete or withdraw theirpreviously announced proposals of private placements. Based on the completion/withdrawal decisions, this paper further examines the impact of market timing on the pricediscount and economic consequences of private placements.Using a sample of firms that completed or withdrew private placements in2006to2009, this paper uses logit regressions to examine the impact of market timing on thewithdrawal probabilities of private placements. Based on their offering purpose, privateplacements are further classified into project-investment type and capital-restructuringtype to examine the impact of offering purpose on the timing behavior. It is found that thecompletion or withdrawal of private placements is resulted by the issuing companies’timing behavior. We find a significant relationship between the withdrawal probability ofprivate placementand the changes in market conditions during the approving process byChina Securities Regulatory Commission (CSRC). A firm’s probability to withdraw itsprivate placement proposal is negatively related to the changes in its market-to-book ratioand changes in the CSRC regulation level during the approving process. Privateplacements of project-investment type are more likely to be withdrawn due to changes inmarket timing than private placements of capital-restructuring type.Using a sample of firms that completed private placements in2006to2011, this paper provides a new explanation for the price discount of private placements from theperspective of market timing. Timing on valuation affects the issuing company’s price inthe secondary market, while timing on regulation affects the issuing company’s pricing ofnew shares in the primary market, therefore the discount reflects the effect of timingbehavior. It is found that changes in valuations and/or security regulation levels during theperiod between the issuance and proposal announcement are positively related to privateplacement discounts. Given the same changes in the regulation level, private placementsto controlling shareholders and/or their related parties have higher discount than privateplacements to only institutional investors. Therefore, the differences in discount betweendifferent investor types are driven by the low pricing to controlling shareholders and/ortheir related parties resulted from the timing behavior on regulation level.Using a sample of firms that completed or withdrew private placements in2006to2009, this paper finds positive announcement effects and positive three-year buy-and-holdabnormal returns (BHARs) for the completion of private placements. The withdrawal ofprivate placements is associated with negative announcement effects and has positive andhigher three-year BHARs. Further analyses show that timing behavior on valuations hasimportant impact on the economic consequences of private placements. The changes inmarket valuation between the issuance and proposal announcement are negatively relatedto the price reaction to the completion, as well as the long-run stock performance of thecompleted private placements.Findings in this paper reveal significant market timing behavior in the privateplacements of listed companies in China, which further affects the price discount andeconomic consequences of private placements. This paper provides a new perspective forresearches on private placements, and at the same time enriches the application of markettiming in Chinese capital market. This paper is of great importance to understand thefinancing activities of listed companies and to improve the regulation policies.