A Study On The SEO Pricing Efficiencies Of Listed Companies

To raise funds for firms is one of the major roles that the security market plays. According to the Pecking Order financing principle, when in short of funds firms would favor internal financing over external financing. And if external financing is indeed necessary, firms would prefer to issue ordinary bonds, convertible bonds and new shares in the particular order. However, contrary to the theory, listed firms in China have demonstrated a strong inclination for seasoned equity offerings(SEOs). And ever since the introduction of the issuance of additional shares in China's A-share market in 1998, it has gradually replaced the rights offering as the dominant type of SEO.Similar with the IPO pricing, the pricing of SEOs is also a core subject in the corporate finance literature. A reasonable price is crucial to the offering: the price on the higher side would lead to either insufficient subscriptions or the worst that could happen, failure of the offer; while the price on the lower side would seriously affect the efficiency of the financing firm and the performance of the capital market on resource allocation.After an analysis on the status quo of China's SEO market, this paper points out that it is imperative to find an effective way to measure the pricing of SEOs on the condition of an ever increasing market. Although traditional ways to evaluate the pricing of new shares conclude that new shares are offered discounted on the evidence that the offer prices are generally lower than respective prices on the secondary market, which is termed"underpricing", the fact that the conclusion is drawn on prices that belong to different markets leaves its validity open to question. In contrast, a careful review reveals that the stochastic frontier analysis(SFA) provides a measure of new share prices without relying on their aftermarket prices, which circumvents the shortcoming of the traditional methodology.After that, this paper does an empirical study on the pricing efficiency of a SEO sample of China's A-share market with SFA. The result indicates that, the offer price of an additional new share is determined by its pre-offer secondary market price, the past EPS and net income, the debt/asset ratio and the age of the issuing firm. In addition, the retained shares of the management and the issuer's industry play a part as well. Meanwhile, the pricing efficiency is affected by the proceeds, the fee ratio, the number of shares offered, the market index, an indicator of whether the offer is public and so on. In a comparison analysis between the traditional underpricing and the pricing inefficiency estimated by SFA, this paper finds a statistically significant discrepancy between the two, which in turn lends support to the statement that underpricing is not an appropriate proxy for offer price discounts.So far the researches on the SEO pricing in China are rarely seen, and this paper tries to make a contribution to this body of literature. On the other hand, this paper also explores the possibility of applying SFA to the measurement of the SEO pricing.