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Abstract
This paper extended the works of Wruck in 1989, and Hertzel and Smith in 1993 by incorporating the effects of corporate reputation on shareholders’ gains and market discounts in private equity placements (PEPs) taking data from the Chinese markets. Results demonstrate that corporate reputation significantly influences the shareholder’s gains in PEPs. Besides, factors such as market discounts, offering percentage, and connected transactions are positively related to the announcement effects whereas changes in ownership concentration negate the shareholders’ returns. By contrast, market discounts show a negative association with reputation status, indicating that reputation serves as a mitigating factor for resolving a firm’s undervaluation problem. These findings expect to help greatly to the managerial decision of PEP issuers in an emerging market.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
Notes
1 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85. PEP is a non-underwritten stock offering sold directly to a single investor or a small group of investors. For details, see Dong et al., “Securities Market Regulation and Private Equity Placements in China.”
2 See Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Kato and Schallheim, “Private Equity Financing in Japan,” 287–307; Krishnamurthy et al.; “Does Investor Identity Matter in Equity Issues,” 210–38; Fonseka et al., “Effects of Regulator’s Announcements, Information Asymmetry and Ownership Changes,” 126–49; Renneboog et al., “Why do Public Firms Go Private in the UK,” 591–628.
3 See Bajaj et al., “Firm Value and Marketability Discounts,” 89–115; Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains, ” 459–85; Chen et al., “Wealth Effects of Private Equity Placements,” 165–184; Chen et al. “Risk, Illiquidity or Marketability,” 41–50; Chen et al. “Earnings Management, Market Discounts,” 1922–32; Lu et al., “Market Discounts and Announcement,” 1411–14; Fonseka et al., “Effects of Regulator’s Announcements,” 126–49; Finnerty, “The Impact of Stock Transfer Restrictions,” 575–609; Wu et al., “Understanding the Positive Announcement,” 385–414.
4 Chinese media is assumed to be under strict control by the state. Investors do not have access to all price sensitive information. Chinese firms also need to have a strong relationship with political leaders to obtain finance. For details, see Fonseka et al., “Effects of Regulator’s Announcements,” 126–49; Fonseka et al. “Political Connections, Ownership Structure and Private Equity,” 2053–77; Besley and Prat, “Handcuffs for the Grabbing Hand,” 720–35; Lu et al., “Market Discounts and Announcement,”1411–14.
5 In 2013, the PEPs raised 224.66 billion RMB, which captures 80.16% of the total refinancing RMB amount of that year in China. See Dong et al., “Securities Market Regulation and Private Equity Placements in China.”
6 Given the growing significance of PEPs as a source of financing, China Securities Regulatory Commission (CSRC) issued “The Administration of the Issuance of Securities by Listed Companies” on May 8, 2006, to ensure regulatory control on PEPs. See Fonseka et al., “Effects of Regulator’s Announcements,”126–49.
7 See Bo et al., “Understanding Seasoned Equity,” 1143–57; Fonseka et al., “Effects of Regulator’s Announcements,”126–49.
8 See Dong et al., “Securities Market Regulation and Private Equity Placements in China.”
9 As opposed to the US PEPs, Chinese firms can not offer equities to an unlimited number of investors. For details, see Dong et al., “Securities Market Regulation and Private Equity Placements in China”; Fonseka et al., “Effects of Regulator’s Announcements,” 126–49.
10 See Fonseka et al., “Effects of Regulator’s Announcements,” 126–49.
11 See Lu et al., “Market Discounts and Announcement,” 1411–14. See, also, Fonseka et al., “Effects of Regulator’s Announcements,” 126–49.
12 See Merton, “A Simple Model,” 483–510; See, also, Besley and Prat, “Handcuffs for the Grabbing Hand?” 720–35; Cumming et al., “Media Coverage and the Foreign Share Discount in China,” 393–412.
13 In China, political connections with the board members play an active role in obtaining low-cost financing. For details, see Fonseka et al., “Political and Interlocking,” 2053–77.
14 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85.
15 See Myers and Majluf, “Corporate Financing and Investment Decisions,” 187–222.
16 For details, see Fonseka et al., “Political and Interlocking Connections in the Boardroom,” 2053–77; “Political Connections, Ownership Structure and Private Equity,” 5648–66; Abidin et al., “Determinants of Ownership,” 304–331; Barclay et al., “Private Placements and Managerial Entrenchment,” 461–84; Wruck and Wu, “Relationship, Corporate Governance, and Performance,” 30–47; Yu and Xu, “The Dissimilation of Announcement Effects of Private Placement”.
17 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Fonseka et al., “Political and Interlocking Connections in the Boardroom,” 2053–77.; Lu et al., “Market Discounts and Announcement,” 1411–14; Renneboog et al., “Why do Public Firms Go Private in the UK,” 591–628.
18 Information hypothesis specifies that investors in private placements demand larger discounts for firms with less public and information and have difficulties in assessing their true value. For details, see Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Cumming et al., “Media Coverage and the Foreign Share Discount in China,” 393–412; Chung and Hwang, “Pricing of Private Placements of Equity,” 90–107.
19 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Lu et al., “Market Discounts and Announcement,” 1411–14; Chen et al., “Risk, Illiquidity or Marketability,” 41–50, “Wealth Effects of Private Equity Placements,” 165–84; Bajaj et al., “Firm Value and Marketability Discounts,” 89–115; Wu et al., “Understanding the Positive Announcement,” 385–414.
20 See Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Renneboog et al., “Why do Public Firms Go Private in the UK,” 591–628; Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Kato Schallheim, “Private Equity Financing in Japan and Corporate Grouping,” 287–307.
21 The ownership structure hypothesis states that changes in the ownership structure due to the private equity placements benefit issuing firms by inviting block shareholders and improving monitoring on the management. See, for example, Demsetz and Lehn, “The Structure of Corporate Ownership,” 1155–77; Schleifer and Vishny, “Large Shareholders and Corporate Control,” 461–88.
22 See Hertzel et al., “Long-Run Performance Following,” 2595–617.
23 See Besley et al., “Private Placements of Common,” 559–68.
24 See Lee and Kocher, “Firm Characteristics and Seasoned Equity Issuance Method”; Hertzel et al., “Long-Run Performance Following Private Placements of Equity,” 2595–617; Brooks and Graham, “Equity Private Placements,” 320–36.
25 For details, see Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Fonseka et al., “Effects of Regulator’s Announcements,” 126–49.
26 Monitoring the management is an important issue in enhancing shareholders’ return. Only active investors (block shareholders) have incentives to monitor the management. For details, see Barclay et al., “Private Placements and Managerial Entrenchment,” 461–84.
27 See Cumming et al., “Private Equity, Leveraged buyout and Governance,” 439–60.
28 See Lu et al., “Market Discounts and Announcement,” 1411–14.
29 See Fonseka et al., “Effects of Regulator’s Announcements,” 126–49.
30 See Silber, “Discounts on Restricted Stock,” 60–64.
31 For details, see Hertzel et al., “Long-Run Performance Following Private Placements of Equity,” 2595–617; Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Barclay et al., “Private Placements and Managerial Entrenchment,” 461–84; Renneboog et al., “Why do Public Firms Go Private in the UK,” 591–628.
32 See Chou et al., “Long-run Underperformance Following,” 1113–28; Hertzel et al., “Long-Run Performance Following Private Placements of Equity,” 2595–617.
33 See Wu, “The Choice of Equity-selling Mechanisms,” 93–119; Chen et al., “Earnings Management, Market Discounts,” 1922–32.
34 For details, see Chen et al., “Earnings Management, Market Discounts,” 1922–32.
35 See Barclay et al., “Private Placements and Managerial Entrenchment,” 461–84.
36 See Wu, “The Choice of Equity-selling Mechanisms,” 93–119.
37 See Chen and Xiong, “Discounts on Illiquid Stocks.”
38 For details, see Wu et al., “Understanding the Positive Announcement,” 385–414; Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Barclay et al., “Private Placements and Managerial Entrenchment,” 461–84; Dong et al., “Securities Market Regulation and Private Equity Placements in China”; Chen et al., “Risk, Illiquidity or Marketability,” 41–50; Fonseka et al., “Effects of Regulator’s Announcements,” 126–46; Finnerty, “The Impact of Stock Transfer Restrictions,” 575–609.
39 See Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Krishnamurthy et al.; “Does Investor Identity Matter in Equity Issues,” 210–38.
40 See Weng and Chen, “Doing Good or Choosing Well,” 223–40; Kitchen and Laurence, “Corporate Reputation,” 103–117; Pharoah, “Corporate Reputation,” 46–51; Roberts and Dowling, “Corporate Reputation and Sustained,” 1077–93; Swift, “Trust, Reputation, and Corporate Accountability to Stakeholders,” 16–26; Milgrom and Roberts, “Relying on the Information of Interested Parties,” 18–32.
41 See Dierickx, “Asset Stock Accumulation,” 1504–11; Fombrun and Shanley, “What’s in a Name?” 233–58.
42 For details, see Barney, “Firm Resources and Sustainable Competitive Advantages”; McGuire et al., “Perceptions of Firms Quality”; Fombrun and Shanley, “What’s in a Name?”233–58; Landon and Smith, “The Use of Quality,” 289–93; Podolny, “A Status-based Model of Market Competition,” 829–72.
43 See Weng and Chen, “Doing Good or Choosing Well?,” 223–40; Cao et al., “Corporate Reputation and the Cost of Equity Capital,” 42–81; Lunawat, “Reputation Effects of Information Sharing,” 75–91.
44 See Wu, “The Choice of Equity-selling Mechanisms,”93–119; Wu et al., “Understanding the Positive Announcement,” 385–414.
45 See Sabate and Puente, “Empirical Analysis of the Relationship,” 161–78; Puncheva, “The Role of Corporate Reputation,” 272–90; Podolny, “A Status-based Model of Market Competition,” 829–72; Kotha et al., “Reputation Building and Performance.”
46 See Podolny, “A Status-based Model of Market Competition,” 829–72.
47 The date of access to CSRC is 28.09.2015.
48 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Lu et al., “Market Discounts and Announcement,” 1411–14; Fonseka et al., “Effects of Regulator’s Announcements,” 126–49.
49 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85.
50 See Wruck, “Equity Ownership Concentration and Firm Value,” 2–38; Hertzel and Smith, “Market Discounts and Shareholder Gains,” 459–85; Krishnamurthy et al., “Does Investor Identity Matter in Equity Issues,” 210–38; Lu et al., “Market Discounts and Announcement,” 1411–14; Fonseka et al., “Effects of Regulator’s Announcements,” 126–49; Chung and Hwang, “Pricing of Private Placements of Equity,” 90–107.
51 See Barclay et al., “Private Placements and Managerial Entrenchment,” 461–84; Wu, “The Choice of Equity-selling Mechanisms,” 93–119.
52 See Kang et al., “The Underreaction Hypothesis and the New Issue Puzzle,” 519–34.
Additional information
Notes on contributors
Bishnu Kumar Adhikary
Dr. Bishnu Kumar Adhikary is Associate Professor at the Graduate School of Business, Doshisha University, Japan. He obtained an MBA (finance) and a Ph.D. from Ritsumeikan Asia Pacific University, Japan. He also earned an MBA (marketing) from Calcutta University, India, and an M.COM (accounting) from the University of Dhaka, Bangladesh. He has publications at different reputed journals such as the Journal of Multinational Financial Management, Asia Pacific Business Review, Journal of Comparative Asian Development, South Asian Journal of Business Studies, and Contemporary South Asia.
Kenji Kutsuna
Dr. Kenji Kutsuna is Professor and Vice Dean of the Graduate School of Science, Technology and Innovation, Kobe University, Japan. He obtained a Ph.D. (commerce) from Osaka City University, Japan. He is also a Professor of entrepreneurial finance at the Graduate School of Business Administration, Kobe University. His academic works have appeared in several high-ranked journals such as the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Banking and Finance, and Journal of Corporate Finance.
Jiakang Xu
Mr. Jiakang Xu is a Research Assistant under Dr. Kenji Kutsuna. He completed Master Degree in Finance from the Graduate School of Business Administration, Kobe University.