Mutual Funds In The Chinese Market To Participate In The Angle Of Directional Issuance Of Listed Company And Performance

Private placement of listed companies, together with its impact on short term and long term stock price performance, is a heated topic studied by many researchers in matured market. Some features, for example, significant issuance price discount, positive short term return, and negative long term return, are widely documented. However, private placement is newly introduced to China market, with history of only 4 years. The related researches are also limited. Therefore, the purpose of this paper is to study the impact of private placement in China market. Another motivation of this paper is the rapid growth of mutual fund industry. Therefore, I combine the two topics together. That is, I especially focus on the roles and performance of mutual funds in private placement to see if mutual funds participate in private placement in the interest of fund unit holders. The basic idea is that if the performance of mutual funds in private placement cannot beat the selected comparable benchmark, the mutual funds are destroying value. By reviewing the regulation rules and requirements related to private placement and mutual fund in China market, I conclude that under the current regulation framework in China, mutual funds can only play as financial investors in private placement.I analyze private placement and its impact from three perspectives, i.e. issuance price discount, short term stock price performance, and long term stock price performance. From the literature review, I find three hypotheses in matured market to explain private placement and its impact. The hypotheses are monitoring hypothesis, certification hypothesis and management entrenchment hypothesis. Both the monitoring hypothesis and the certification hypothesis predict that there will be issuance price discount and both short term stock price performance and long term stock price performance will be positive. The differences between the two hypotheses are the reason of discount and how investors behave after private placement. However, the prediction of management entrenchment hypothesis is quite different, as it predicts that both the short term stock price performance and long term stock price performance will be negative.For the purpose of this research, I study the samples not only as a whole, but also dividing them into groups according to the type of participating investors. With regard to the models, I use cumulative abnormal return (CAR) method to study short term market reaction and buy-and-hold abnormal return (BHAR) method to study long term stock price performance. To strengthen the conclusion with long term stock price performance, I adopt a bootstrapping procedure. I also conduct a multiple regression to identify the factors that affect the long term abnormal return and their relations. The private placement samples studied in this research are from 2006 to May,2009. The data and information are collected from Wind database and Bloomberg. The software used for statistic analysis is MATLAB 7.0.As the outcome of this research, I identify the existence of issuance price discount. I also identify that in most cases the stock price has positive performance during the announcement period, which indicates that private placement in general is welcomed by the market. Based on these findings, I think the monitoring hypothesis and certification hypothesis are applicable in China market, because they are suitable in explaining the significant issuance price discount and short term positive stock price performances. However, I find no obvious evidence to support the management entrenchment hypothesis, which argues that the managements use private placement to protect their control over the company. In terms of long term stock price performance,I find that there is a positive abnormal return. However, the positive return is not significant with three testing methods, the t-test, the Wilcoxon signrank test and the bootstrapping test. Therefore,I think due to the short history of private placement in China market, the long term impact of private placement is still uncertain. I also regress the long term buy-and-hold abnormal return over several variables, e.g. market cap, P/B ratio, ROE, and D/E ratio. I find that the long term abnormal return has a negative relation with the size of the company. This is consistent with the certification hypothesis, as the smaller the company, the more likely it is undervalued and the more valuable the private placement is. I also find that healthier companies, in terms of profitability and financial leverage, tend to have better abnormal return after private placement.With regard to mutual funds, I find that they obtain significant discount at the issuance stage, although the discount might be smaller than that to other kind of participating investors. The short term market performance also reveals that the market reaction towards private placements issued to mutual funds is worse than those issued to major shareholders and other institutional investors. According to the monitoring hypothesis, I think this is because mutual funds have less monitoring power than major shareholders and strategic investors, and thus bring less benefit to the investors. In long term, as what I have illustrated, the abnormal return is not significantly different from zero. In sum, for mutual funds, the profit of participating in private placement is mainly from the issuance price discount. It is prudent to say there is no evidence to prove that mutual funds are destroying values for fund unit holders.