Abnormal Return Of Directional Add-issuance In A-share Market

Since the promulgation and the implementation on May8,2006ofthe “Securities Offering Management Method of Listed Companies”, theregulator has for the first time explicitly stated the conditions andprocedures of directional add-issuance, also known as directionaladd-issuance. As directional add-issuance has no immediate expansionpressure, low threshold, and shorter offering cycle, among other uniqueadvantages, the directional add-issuance has quickly become one of themost important ways for refinancing of listed companies in China. As ofDecember31,2012, all A-shares listed companies have successfullyimplemented907cases of directional add-issuance; total financingamounts to1.802trillion Yuan.Because directional add-issuance is generally offered at a discount,the barrier to entry is high as the legal provisions allow no more than10subjects. As a result, directional add-issuance in the primary market isquite popular with institutional investors.Excess return is notable in the history of the directional add-issuancein the primary market. From January2006until the end of2012(excluding284directional add-issuance that are either still locked-up orunable to query the release date), compared on the CSI300benchmark,directional add-issuance at the primary market demonstrated excessreturn of77.0%on average; the probability of positive relative return is76.6%. The absolute return is as high as82.5%; the probability ofpositive absolute return is64.0%. The directional add-issuance open toinstitutional investors has been highly rewarding. Compared to the CSI300benchmark, institutional investors has excess returns on average of52.7%; the probability of positive return is74.0%. However, directional add-issuance still cannot escape the influenceof the macro economy. As the markets sputter, the probability of offeringpriced below range has come to more attention. According to statistics[1]from How Buy Fund Research Center, the return and probability ofoffering priced below range are inversely related. In2006, the entiredirectional add-issuance scheme returned over300%to investors. In2007-2010, the annual market returns is over50%. In2011, the unilateraldownside market brought a hit to the directional add-issuance market: theoverall return dropped to13.03%and the probability of offering pricedbelow range was as high as64.25%.So, what are the factors that affect the excess return of thedirectional add-issuance in the primary market? Do the secondary marketinvestors also have opportunity to benefit from the directionaladd-issuance? Does the decline of mean gain in primary and secondaryadditional stock offering in the second half of2011mean that directionaladd-issuance’s immense growth have become a history?In comprehension of the above phenomenon, this paper reviewed thedomestic and foreign research literature on directional add-issuance andtraced the history on directional add-issuance in the A-Shares market, itsbased basic process and phenomenon. The paper selected623directionaladd-issuance of stocks from January1,2006to December31,2012asstatistical sample; through analyzing market sentiment, financial capital,directional add-issuance scheme, and supply and demand of the scheme,this paper seeks to analyze quantitatively the influence of the fourdimensions on the excess return of the scheme on the primary market andsecondary market. This paper seeks to build a model for calculating thediscount/premium of a directional add-issuance scheme on itsannouncement date and build another model on calculating the excessreturn after its announcement date. This paper seeks to discoveropportunities for excess return in the directional add-issuance market.