An Study On Seasonal Capital Offering In China Markets

In the recent years, the seasonal equity markets in China has beenexperiencing a hot topic for researchers and investors. On one hand, themarket has grown rapidly. In last year, as the overall equity listingmarkets was strictly controlled in China, the total amount of seasonalequity markets reached RMB261.39billion, surpassing the amount ofIPO markets for the first time. On the other hand, many follow-oncompanies shows negative financial performances right after the seasonaloffering, making the investors to doubt its motivation. Therefore, thedissertation try to explain this phenomenon by examining if the companyhas the urge to issue follow-on offering just to increase its capital andassets, rather than investing in a promising projects. The dissertation findsthat this kind of urge can explain the negative performance of follow-onoffering markets in China, and finally harmed the mechanism of thecapital markets.The dissertation first goes back the history of seasonal equity offeringmarkets in China by summarizing all the relevant regulations, leading to a conclusion that Chinese companies tend to issue stock more than what isactually needed. Then the paper analyzes the current trends and issues inChina’s seasonal offering markets, and concludes the followingcharacteristics: growing size and poor performance. Also companies inreal estate industry and mass-manufacturing industry have a biggerchance to do seasonal offering, and so is SoEs. In the third part of thepaper, it raises the idea that China listed company has the urge to expandits capital reserve, which is due to the special corporate governance statusin China. Firstly, insider-control is a common issue in China. Secondly,China SoEs often has a huge amount of non-tradable equity. Finally, thepromotion of managers in Chinese SoEs are often directly related to thecapital reserve and asset of the company, rather than the company’sfinancial performance. The paper also examines the company’s urge toexpand its capital from the usage of the received capital, and concludedthat if the money is invested in a entirely new business, or to improve itscapital structure, then we can assume that the company itself has the urgeto expand the capital bases. In the fifth part of the paper, it uses anempirical model to prove the assumptions that this kind of urge andobsession about capital caused the negative performance of SEOcompanies. The followings can be concluded from the empirical study: a.companies investing in new businesses and improving capital structureperforms more poorly; b. the amount of money received from SEO is negatively correlated to the company’s performance; c. SoEs tend toperform better than SMEs; d. the amount of the stocks owned by biggestshareholder has a negative correlation with the performance. The paperthen concludes that China listed company’s urge to expand the capitalreserve will cause negative impacts on the overall capital markets, as wellas harming the mass group of individual investors and causing a “bubble”in the economy. Finally the paper gives some advise to individualinvestors in terms of how to select the right SEO target.