Complete Listing By Private Equity Placements:Tunneling Or Alignment Of Interests

Basing on the two private equity placements made by the Inner Mongolia YILI Energy Company Limited, this paper tries to ascertain whether these two private equity placements are alignment of interests or tunneling. Basing on the review of former studies, as well as the studies of related theories and policies, this paper finds that there are great risks of tunneling in private equity placements issued to the substantial shareholders under the market environment and policies of China. Since theories and practices have proved that sometimes it’s reasonable to transfer some interests to the investors as compensation in private equity placements, this paper holds the opinion that tunneling and alignment of interests must be considered at the same time to judge whether the private equity placement of a certain company is tunneling or not.By analyzing the horizontal competitions, the connected transactions, the operating performance of the company and the performance of the company’s stock1, this paper finds that the horizontal competition problem of the company is solved while the connected transaction problem still exits. Comparing the company’s main financial ratios with the market’s standards, this paper finds that the company’s operating performance is just among the average achievements of the market. Because of the announcement effects of the company’s two private equity placements, the short-term returns of the investors are better than the market’s average achievements. But the long-term cumulative return of the company’s stock shows that the long-term performance of the company’s stock is among the average achievements of the market. This paper holds the opinion that the company does not realize significant alignment of interests after its complete listing by private equity placement.By checking the price of the equities issued, the cash flow between the company and its substantial shareholder as well as the pricing of the assets, this paper examines whether the private equity placements of the company are tunneling. This paper finds no sufficient proofs of tunneling in the first private equity placement of the company. The price of the equities issued is not the lowest that can be realized, and evidences proved that the pricing of assets is reasonable.This paper suspects that serious tunneling exists after the first private equity placement and in the second private equity placement of the company. By using the methods of applying unreasonable profit-sharing policies, choosing the reference date of pricing and over valuing the assets, interests are transferred to the institutional investors and the substantial shareholders by the managers of the company. Great amount of cash bonuses are issued while the company is in great need of money, and most of the cash bonuses flow to the company’s substantial shareholder, the cash bonuses also cut down the price of equities issued in the company’s second private equity placement. The company transforms great amount of its additional paid-in capital into its capital twice after its first private equity placement, which not only secure the substantial shareholder’s control of the company but also cut down the price of equities issued in the second private equity placement. This paper suspects that the pricing of asset in the second private equity placement is not reasonable since the price is much greater than the price of similar trades and the reactions of the institutional investors are also the proofs of this opinion.The main contributions of this paper are as followed. This paper supports the opinion that asymmetric information hypothesis and agency problem hypothesis can explain most problems in private equity placements well. In China, the monitoring effect hypothesis should not be used to explain the private equity placements which are only issued to the substantial shareholders. Limited by the case, this paper doesn’t examine the managerial entrenchment hypothesis. This paper finds that there are significant announcement effects in both of the two private equity placements of the company, but the announcement effects do not always appear on the date when the board announces its decision. This paper finds that the company can avoid the policy of pricing the stock easily by using the methods of applying unreasonable profit-sharing policies, choosing the reference date of pricing. There is a great flaw in the pricing policy of private equity placements. This paper shows the gaming progress among the managers of the company, the institutional investors and the substantial shareholders. This paper suspects that the managers of the company, the institutional investor and the substantial shareholders finally conspired to transfer interests from the company. But limited by the case, this paper can’t analyze this problem further.The main weaknesses of this paper are as followed. For the uniqueness of this paper’ research, some of the data this paper needs can’t be achieved. This paper solves this problem by more theory-based analysis and rational analysis, but it also weakens the reliability of this paper. The research of this paper suggests that the supervisors should not only pay attention to the objects of private equity placements but also to the applications of money collected.This paper includes5chapters:chapter1is introduction; chapter2is literature review; chapter3is theoretical and institutional analysis; chapter4is case analysis; chapter5is conclusion and suggestion.