Discount On Private Placement: Liquidity Constraint Cost Or Tunneling?

As A-share refinancing market growing and the private placement asa primary means of refinancing, the discount phenomenon become an issueworthy of attention. Foreign scholars have put forward some influentialhypothesis like monitoring hypothesis, information asymmetry hypothesisand management entrenchment hypothesis. The private placement ofshares generally has a1to3years lock-up period, and clearly there isinsufficient research on the cost of liquidity constraints brings to theprivate placement discount. This paper aims to study the cost of liquidityconstraints brings to private placement discount, and then study therelationship between the tunneling and private placement discount.Referred Longstaff et al (2003)[1]paper’s non-liquidity assets pricingmodel, to establish theoretical models of liquidity constraints cost broughtabout the lock-up period in the private placement of new shares issueddiscount. Build an equilibrium model in the private placement-controllingbetween major shareholder and minority shareholder, which theoreticallydemonstrate the motivation of controlling shareholder of tunneling byinjecting assets. Using Matlab to calculate numerical value of liquidityconstraints which is very significant, liquidity constraints brought aboutdiscount as much as10%-30%, in order to make investors feel indifferentby selling or holding the asset.Taking into account the concentrated structure of the domestic equitymarket, in the empirical study, investors are divided into two types namedinstitutional investors, the controlling shareholder and its related parties.These two types of investors are facing different liquidity constraints.Through empirical research of the relationship between the parameters of liquidity constraints and discounts, the study concluded that institutionalinvestors face greater liquidity constraints compared to the controllingshareholder. Further empirical studies suggest that high discount of thecontrolling shareholders to subscribe for new shares in issue actuallydiluted the interests of minority shareholders, which is one of tunnelingbehaviors. High private placement discount derived from asymmetricadvantage and the pricing power of controlling shareholder.