ABSTRACT
Using data on private placements in China from 2007 to 2014, we show that abnormal returns of issuing companies’ stocks are significantly positive on the announcement day, but they become significantly negative during the event window [−20, +20]. Participation by institutional investors has a significant and negative impact on the short-term stock returns. This negative effect is also present in issuing companies’ long-term stock returns and profitability. Furthermore, we find that participation by institutional investors reduces dividend payments after private placements. Overall, our findings do not support the monitoring hypothesis of institutional investors’ role in corporate finance but are consistent with the management entrenchment hypothesis and shareholder pessimism hypothesis.
Notes
1. The numbers are based on data provided by Shanghai Wind Information Technology (WIND). The estimated USD amounts are based on the foreign exchange rate at the end of 2007, 2015, and 2016, respectively.
2. The numbers are estimated based on the China Stock Market and Accounting Research (CSMAR) database.
3. Wang and Zhang (Citation2006) hypothesize that the ownership structure of shareholders could be one important factor that affects issuing companies’ performance, but they do not provide any empirical evidence.