Controlling Shareholder And Private Equity Price: Tunneling, Alignment And Mutual Effect

There are a lot of new phenomena and new things accrued in Chinese capitalmarket after the reforming of Equity division. In May of2006, the China SecuritiesRegulatory Commission issued management measures about issuance of securities ofListed Companies, which formulated non-public placement behavior (referred to asprivate equity) of listed companies specifically. Private equity quickly became a newoption for listed companies in equity financing, as the threshold of issuance is lower andprocedure is simple relatively. At the same time, private equity is often associated withasset injection and overall listing and other capital management activities, which canhelp solve associated transaction、horizontal competition and other problems that existin Chinese listing companies chronically. Therefore, the private equity is popular inmany listing companies, and gets rapid promotion. The private equity price is the mostimportant core link in private equity. This is because the level of the issue price has asignificant impact on the interests of the old and new shareholders, and refers to thedistribution of interests, which may becomes a mean to transfer and transport interestsby the largest shareholder or certain interest groups.In order to further understand the inherent laws of the private equity, especially theinfluencing factor and formation mechanism of private equity price. This paper researchthe influence of the controlling shareholders to the private equity price combined withthe governance characteristics of the listed company, from the angle of the intereststendency and behavioral characteristic of the controlling shareholder.This paper concludes the relative literature review about private equity first, thendescribes the situation of private equity in China, including the present situation and theproblems in price setting process, then analyses the behavioral characteristic ofcontrolling shareholders and raises the empirical hypothesis, then constructs linearregression model with a sample of companies that have finished private equity, inspectthe hypothesis by the software of SPSS. Then draw the main conclusion of this text asfollows: The price of the private equity price can be influenced by the controllingshareholder’s “tunneling effect” and “alignment effect”. Tunneling effect can reduce theprice, while alignment effect raises the price. Meanwhile, the research also suggests thatthe under-pricing effect from the controlling shareholder’s tunneling effect can’t beweakened by the alignment effect as the controlling shareholder increases its stake, but the alignment effect can be weaken by the tunneling effect.At last, propose some policy recommendations：During the process of privateequity, in order to prevent the benefit transportation to controlling shareholders, actionsshould be taken as follow: strength the supervision on the activities of controllingshareholder, optimize the operation mechanism of private equity, make the rule of issueprice refined and focus on monitoring private equity price, actively introduce outsideinvestors, weaken the influence of controlling shareholder.