Short-run Stock Price Performance Following Private Placement Of Seasoned Equity Offerings

Since year 2006, private placement of seasoned equity offerings has gradually grown into the mainstream way of equity refinancing of listed companies in Chinese A-share market because of low issuance threshold and convenient operation. Lots of empirical studies have been conducted to explore and explain the announcement effect of private placement. Among them, not only the direction and significance of stock performance have been analyzed, but also different hypothesis by western scholars have been tested, and moreover, some new hypothesis related to the reality in Chinese market have been proposed to explain the phenomenon. This paper aims to investigate how the short-run stock price performs following private placement of seasoned equity offerings in Chinese market in comparison with some developed market. Through the event study for a sample of 255 private placements for the period from year 2006 to 2010 in A-share market in China, the author documents a significantly positive CAAR of 12.015% for the announcement window [-10,10] of board of directors’meeting, with daily cumulative average abnormal return at about 0.57%. The result of positive announcement effect is therefore in accordance with the market response in other mature financial markets such as the United States. And furthermore, the paper aims to explore the main factors affecting the short-run stock price performance of firms conducting private placement, in which the author hopes can help firms and investors better understand and take use of the unique mean of seasoned equity offerings in China. Results from regression analysis show that positive cumulative average abnormal returns at the announcement of private placements are closely related to variables as Fraction Placed, logarithm of firm’s book value and discount, which are proxies for information asymmetry and firm quality. So the author concludes that among the traditional theories addressing on the problem of positive announcement effect, information asymmetry hypothesis and firm quality hypothesis are more appropriate to be applied to explain and understand the phenomenon in Chinese A-share market during the recent years.