The Operating Performance Change And Determinants Of Seasoned Equity Offerings

Chinese firms conducting 87 seasoned equity offerings (SEOs) during 1998-2001 generally have increasing profitably levels prior to the offering. Meanwhile, those companies experience a sharp, statistically significant decrease in profitability following the SEO in both size industry-adjusted and unadjusted comparisons. It has been observed that the level of agency cost prior to the issue is not high and the SEO firms have no lack of money. We also find that fund raised by the SEO companies is not been invested to the promising projects but deposited to the bank or speculated to the short-term capital market. In addition, during the more relaxed SEO policy enforcement period the operating performance of SEO firms are significantly worse than the matching firms.In contrast to evidence from U.S. and Spain, cross-sectional variation of post-issue performance changes is not related to the level of free cash flow prior to the issue. Our results from the Chinese financial markets are inconsistent with free cash flow theory. Consistent with evidence from Japan, our regression results indicate that changes in operating performance are significantly negatively related to the level of performance prior to the issue. In other words, the higher the pre-issue level profitability, the greater the post-issue decline. Hence the results from Chinese SEO market offer evidence Consistent with the overvaluation hypothesis for the downward drift following the seasoned offering. Meanwhile, our result indicate that the higher pre-issue non-liquid owners ratio, the greater the post-issue decline . Hence the results from Chinese SEO market offer unique evidence Consistent with the duality ownership structure theory.