Study On The Associated Shareholders Subscription Of Private Placement Equity

Private equity financing firstly appeared in countries such as Britain and The Unites States in the 90's. After the reform of the shareholder structure,there was a boom in private placement in China, which is similar to private equity financing in other countries. However, the difference is that private placement can be issued to associated shareholders who can participate in the subscription for new shares in China. Since the process of private placement is a large-scale related transactionwhen associated shareholders subscribe the shares, it is easy to cause the problem of adverse selection in the case of asymmetric information. It is likely that associated shareholders use their control of the company to tunneling, resulting in damage to the interests of minority shareholders. During private equity placement, associated shareholders are definitely the infor-advantager. Associated shareholders take advantage of the information they have on the corporation growth, R&D expenditure and the quality of injected assets, and make decision on whether to participate in the subscription for new shares. Associated shareholders can even manipulate company's earnings by using the option of R&D expenditure to influence issuance price of the shares, thereby subscribing the shares with lower cost. Associated shareholders can also inject bad assetsinto listed companies from the group company to gain interests for themselves and cause damage to minority shareholders.Therefore, this paper focuses on the impact on the subscription for new shares in private placement with associated shareholders from three perspectives namely corporation growth, R&D expenditure and types of injected assets. After thorough investigation and analysis, this paper demonstrates how subscription decisions are made by associated shareholders in the case of asymmetric information, by taking advantage of information on the three perspectives mentioned above. Analysis has been made on how shareholders manipulate the company by management to influenceshare issuance price and how bad assets are injected through private placement; Hence,this study can make certain contribution to thehealthy development of the subscription for new shares in private placement with associated shareholders in China.This paper conducts a reasonable review on private placement, associated shareholders' tunneling, corporation growth, R&D expenditure and asset injection from domestic and foreign literature. It confirms that tunneling do exist in listed companies both local and abroad in private placement. Thisissue is more serious in China due to the fundamental differences of institutional environment. In particular, new shares in private placement can be issued to associated shareholders which creates more favorable conditions for tunneling. Through literature review, it is demonstrated that research of private placement mainly focus on announcement effects, the influence on shareholders, long-term yields and corporate performance, tunnelingetc. There are little literature focusing on factors which influence the subscription of new shares for associated shareholders in private placement or the problem of tunneling during the process. Therefore, it is essential to study the impact of corporation growth, R&D expenditure and types of asset injection have on associated shareholders' subscription under information asymmetry.In the light of theories of asymmetric-information, private placement and tunneling,this paper systematically analyzes reasons of decision made by associated shareholders on subscription for new shares in private placement by taking advantage of information they have. Motivation and consequences of associated shareholders' control and manipulation of R&D expenditure as well as assets injection are deeply analyzed. On the basis of theoretical analysis, the study proposed the following hypotheses:(1) With higher corporation growth, associated shareholders are more motivated to participate in the subscription for new shares, namely higher proportion of subscription;(2) Higher extent of information asymmetry and corporation growth leads to higher proportion of subscription;(3) Higher R&D expenditure in private placement corporation results in more motivation of associated shareholders to subscribe new shares, namely higher proportion of subscription;(4) Higher research expense leads to higher proportion of subscription;(5) With higher extent of information asymmetry, the positive correlation between R&D expenditure and proportion of subscription is more significant;(6) As extent of asymmetric information becomes higher, the positive correlation between research expense and proportion of subscription becomes more significant;(7) When the correlation between the assets injection in private placement and original assets of listed companies becomes more significant, the proportion of subscription for new shares with major shareholders becomes higher;(8) When the correlation between the injected assets and original assets in private placement becomes more significant , corporate performance becomes better after assets injection;(9) With higher extent of information asymmetry as well as a more significant correlation between injected assets from listed companies in private placement and original assets private placement companies already have, a higher proportion of subscription can be achieved.Based on theoretical analysis, this paper selects research objects from the listed companies in private placement announced between 2008 and 2013, conducting an empirical test on the impact of corporation growth, R&D expenditure and types of assets injection on subscription for new shares in private placement with associated shareholders. The results of the test prove the conclusions of theoretical analysis. At last,this paper summarizes basic conclusions of the study and proposes related policy recommendations.Contribution of this paper is mainly manifested in:(1) Previous research on private placement mainly focuses on influence of shareholders, wealth effect and the relationship between discount issue, assets injection,earnings management and tunneling. Based on asymmetric-information theory and the background that listed companies can issue shares to associated shareholders in private placement in China, this paper proposes hypotheses that, in the case of information asymmetry, associated shareholders have adverse selection. It also studies impact that corporation growth, R&D expenditure and types of assets injection have on subscription for new shares in private placement with associated shareholders. The paper holds the view that associated shareholders take advantage of the information they have on corporation growth, R&D expenditure and quality of injected assets so that they can make decision on whether to subscribe new shares. However, non-associated shareholders do not have such information so they participate innegatively or give up subscribing new shares. The above findings extend research on the application of asymmetric information theory in private placement.(2) On the basis of asymmetric-information theory and corporation growth theory,the study discovers that associated shareholders hold private information on corporation growth in the private placement, resulting in their active subscription for new shares,while other investors tend to participate in negatively or even give up subscribing new shares.Additionally, with higher extent of asymmetric information and higher corporation growth, the proportion of subscription for new shares with associated shareholders is higher. The study develops the application of corporation growth theory in private placement.(3) Previous research on R&D expenditure mainly discusses its influence on corporate performance and market value. This paper looks further into the impact on subscription for new shares with associated shareholders from R&D expenditure being dealt with in the current profit and loss or its capitalization. The study also reveals that listed companies make use of research expense and development expenditure to manipulate earnings in order to subscribe new shares with lower cost. It is believed that the research can enrich studies on relationship between R&D expenditure and corporate earnings.(4) Literature on assets injection mainly focus on tunneling while this paper argues that propping exists as well in listed companies during private placement. When the correlation between injected assets in private placement and original assets of issuing companies is more significant, the proportion, of subscription with major shareholders is higher. Meanwhile, share proportion of major shareholders will be further increased which assists in reinforcing their control of the share-issuing companies so as to improve corporate performance after assets injection. The findings enrich theoretical studies on assets injection of listed companies in private placement in China.