Announcement Effect Of Seasoned Equity Offering--Empirical Test In Chinese Security Market

Plenty of studies in western countries have focused on the stock price reaction to seasoned equity offerings. These studies suggest that there always exists a small price reduction when listed companies announce an equity offering plan. It is always being called announcement effect. On average, a 3% price drop is documented around the announcements of new equity offerings. A number of hypotheses have been advanced to explain the negative average common stock abnormal return following new equity issue announcements. These are broadly categorized into price pressure hypothesis, leverage hypothesis, information hypothesis, agency theory models and free cash flow hypothesis.In this paper we attempt to investigate the announcement effect of seasoned equity offering in Chinese stock market. We address two questions: (1) what are the sign and magnitude of the abnormal price reaction to announcements of equity offerings made by Chinese listed companies, and (2) what are the factors that explain the cross-sectional variation in the abnormal returns following equity offerings announcements?The sample studied in our research including 75 companies which had carried out seasoned equity offerings from June, 1998 to March 31, 2004. In comparison with the approximately 3% decline in returns reported in western studies on seasoned equity offerings, the equity offerings made by listed companied in Chinese stock market is associated with a statistically average decline in returns of 2.40% for the four day announcement period (days -1 to day +2). Besides this, we define the ration of the change in the equity value of the firm to the proceeds of the issue as 'offering dilution'. The average dilution for seasoned equity offering in China is -14.54%. At the same time, we find that Chinese listed companied can not time equity offering. We also conduct a cross-sectional analysis of the relation between the stock price effects at the announcement of equity offerings and determinants of the price response suggested by the four hypotheses: price pressure hypothesis, leverage hypothesis, information hypothesis and free cash flow hypothesis. As a result, we do not find that the stock price effects are related to the determinants indicated by the hypotheses. However, we detect a significant relation between abnormal returns and the determinants specific in Chinese equity offering market such as primary liquid equity owners preference ration, price discount, non-liquid equity ration and cash reserve. We conclude that our market support low price discount, and the duality ownership structure would hinder the development of seasoned equity offering as an important refinancing alternative.The paper is organized as follows: Section 1 contains a literature review of the previous research on the announcement effect of seasoned equity offering. In section 2 we introduce the background of seasoned equity offering in Chinese security market. In section 3 we present our methods of measuring and the sample design and description. In section 4 we discuss announcement effect in our country. In section 5 we test four hypotheses and some determinants specific in Chinese equity offering market. In the last section we draw some conclusions and give some advices.