The Cross Market Effect Of Private Equity Placement

After the implementation of the new Securities Law and the completion of the share split reform in China,private equity placement has been selected by increasingly many listed companies,thus surpassing public offering and becoming the most common method for equity financing in China.Whether this kind of financing will be recognized by stock and bond investors,and how the capital market will react to it is an urgent problem to be solved.Although the stock market reaction to private equity placement using data from different countries and regions has been documented in the literature,due to the development of bond market in China,there is no recent or large sample evidence regarding bondholder reactions.As the capital market continues to mature in China,bonds have become the primary financial investment tool;this provides a good opportunity to study the bond market.Based on the reality of Chinese institutional backgrounds,we analyze the signaling,free cash flow,and wealth transfer hypotheses and predict the potential reaction of the stock and bond markets regarding private equity placement.We use data samples from A-share listed companies with private equity placement announcements that have issued corporate bonds over the period 2008–2017.We examine the cross market effect of private equity placement and identify the explanatory power of various hypotheses by using the event study method,multiple regression and other measurement methods.The results show that the stock market reacts negatively to private equity placement and stock abnormal returns are negatively correlated with the issue size of private equity placement.The bond market reacts positively to private equity placement,and bond abnormal returns are positively correlated with the issue size of private equity placement.However,no significant changes are noted in firm returns—the wealth transfer hypothesis can explain the capital market reaction to private equity placement in China.Moreover,combined with the theoretical connotation of the wealth transfer hypotheses,considering the different characteristics of bond issuance and the unique institutional background of China,we examine the differences in capital market reactions because of variations in bond characteristics and the nature of property rights.We observed that bond maturity has no effect on the cumulative average abnormal returns(CAARs)of private equity placement.The change in CAARs of private equity placement in firms with low credit rating bonds is significantly larger than that of firms with high credit rating bonds.The change in CAARs of private equity placement in non-state-owned enterprises is significantly larger than that of state-owned enterprises.In other words,the wealth transfer effect of non-state-owned enterprises and firms with low credit rating bond is stronger.The research conclusions of this paper supplement the stock and bond market evidence for the reaction of the capital market to private placement in China.We have comprehensively tested the explanatory functions of the signaling,free cash flow,and wealth transfer hypotheses in the empirical research,and provide a theoretical basis for the improvement of corporate governance and the current private placement policy in China.