The market and operating performance of Chinese seasoned equity offerings

Abstract

This article examines the short-term market and the long-term operating performance of Chinese seasoned equity issues (Seasoned Equity Offerings (SEOs)). Employing data for 596 rights offerings and 181 private placements for the period 1998 to 2004, we find significant positive short-term market reaction for both rights offerings and private placements; however, the long-term operating performance of the firms offering private placements is significantly better than the rights offering firms. In China, firms issuing rights offerings are required to adhere to strict rules set by the Chinese Securities Regulatory Commission (CSRC). These firms must meet minimum standards with respect to earnings and profitability before being permitted to issue rights offerings. Firms issuing private placements are not required to meet the same strict earnings/profitability requirements. Our results suggest that the regulatory oversight is important for the short-term market reaction of the equity issuing firms. However, it is not a determinant of the long-term performance of the firms. Also, our results provide some evidence that firms issuing rights offerings may manipulate their past earnings and profitability measures in order to reach the requirements set forth by the CSRC. The identity of the equity buyer seems to be a better determinant of the long-term profitability of the equity issuing firms.

Notes

¹ Myers and Majluf (1984) and Miller and Rock (1985) provide theoretical explanations for the negative announcement effects of new SEOs. Loughran and Ritter (1995) provide empirical evidence of the negative announcement effects.

² Asquith and Mullins (1986) and Eckbo and Masulis (1992) provide a comparative evidence of the short-term reaction of different SEO issue methods in the order of −2.5% to −3.5%.