Research On The Economic Consequence Of The Related Party Transactions Before And After Seasoned Equity Offering

With the development of security market, the issue of related party transactions becomes a cause of concern in China. In order to achieve the optimal allocation of resources in capital market, related departments set high standards to initial public offering, seasoned equity offering and delisting, mainly showing up as the strict profitability requirement. Eventhough companies in China strongly prefer to initial public offering and seasoned equity offering. In sharp contrast, investors show the phlegmatic reaction to their announcements. In2012, there are403listed companies proposing secondary public offering plan while only37companies successfully make it. Besides, several companies substantially cut the number of newly-issuing stock among the37companies. For example, Baoxiniao cut back on the number by95%, changing from a hundred million to five million; the amount of money raised by Zhonghang Electronic is less than20%of the original plan. The phenomenon not only has a connection with the depression of macroscopical economy, but also with the cautiousness of investors who lose faith in security market. To some degree, equity refinancing is thought to be the method of gaining money by cheating. The money got from capital market is the free lunch to companies. Because of the’lemon effect’which has distorted the resource allocation function of the capital market, part of companies needing money for good investment projects can’t raise money. Compared with other traditional earnings manipulation methods, such as the choice of accounting policy, changes in accounting estimates and the use of the items below the line, related party transactions have both positive natures of cost saving and negative natures of complexity, elusiveness. That’s why using related party transactions is popular among companies which have the intention of equity refinancing while regulators think it is difficult to supervise these transactions. So related party transactions have an important impact on the healthy development of capital market. The standards set by China Securities Regulatory Commission are meaningless unless the performance of company and accounting information disclosed by company are reliable. Therefore, how to prevent companies from using improper, unfair related party transactions for seasoned equity offering to enhance investors’ confidence towards capital market is the urgent issue for regulators.The thesis contains five parts. The first part is introduction. It emphasizes on the background and significance of the thesis, and the research frame on the basis of a great deal of literature in home and abroad. The second part is research foundation of the effect of related party transactions before and after seasoned equity offering. It defines the core concepts:related party transactions, seasoned equity offering, and the economic effect. Besides it introduces transaction cost theory, agency theory and asymmetric information theory, making sound foundation for the empirical research. The third part is the characteristics of related party transactions before and after seasoned equity offering. The thesis chooses A-listed companies performing seasoned equity offering in2009and2010as the research sample. After analyzing the general features and categories of related party transactions, I select the top three categories:related party purchase and sale, related party fund trading and related party guarantee as the research subject. The fourth part is the empirical research, which is the most important part. It analyzes the effect of related party transactions on companies’performance (ROA and Tobin’q) and earnings quality (earnings’value relevance) before and after seasoned equity offering. The fifth part is research conclusions and policy suggestions. According to the research conclusions, vigorously developing capital market, enlarging refinancing channels, perfecting information disclosure about related party transactions, strengthening outside supervisions may be helpful to solve existing problems.The result of the empirical research shows that related party transactions have positive correlation with company performance (ROA and Tobin’q) with no significance before seasoned equity offering but have significant negative correlation with company performance (ROA and Tobin’q) after seasoned equity offering. With regard to earnings quality judged by earnings’value relevance, related party transactions have significant negative correlation with it before and after seasoned equity offering, which means that investors always make negative judgments about related party transactions.