Market Reaction to Seasoned Offerings in China

Abstract

This study examines stock market reaction to the announcement of various forms of seasoned issues in China. Our empirical evidence demonstrates that market reactions differ in ways that suggest a difference between management's internal assessment and the market's assessment of the stock price. The market responds unfavourably to the announcement, notably in the case of rights issues and also with regard to open offers. Private placements experience an unfavourable pre-announcement reaction, which contrasts with the favourable reaction after the event. Convertible bond issues generate positive excess returns consistent with the market's confidence that they can help to align management and shareholders' interests. Further investigation shows that market reaction is related to factors specific to the issuer and issue by reference to the period immediately surrounding the issue. Specifically, ownership concentration, agency matters connected with equity offerings, investor protection connected with fund allocation and security pricing, and the influence of powerful moneyed interests together provide an instructive insight into market reaction. Institutional inefficiency pertaining to underwriting, auditing, analysts' forecasts and credit ratings are found to have a weak association with market price, consistent with due public scepticism concerning management and their gatekeepers.

Bond offerings in China

“…Our conclusion of a positive stock market reaction can be related to the finding of Liu et al . () in their analysis of the impact of seasoned offering issues on market valuation: they find a positive stock market reaction following convertible bond offerings.…”

“…Liu et al . () have analyzed the stock market reaction following seasoned offerings including convertible bonds. Our work helps understand the valuation effects of bond issues in China.…”

“…Pessarossi and Weill (2013) have examined the determinants of the choice between corporate bonds and syndicated loans, while Lin and Milhaupt (2016) use a network perspective to explore this market. Liu et al (2016) have analyzed the stock market reaction following seasoned offerings including convertible bonds. Our work helps understand the valuation effects of bond issues in China.…”

“… We use the announcement date to study the corporate bond issuance in line with former literature (for instance, Liu et al ., ). Eckbo () has shown that the announcement date is the most appropriate date for such studies since it is the definitive date. …”

“…See MacKinlay (1997) for a review.7 We use the announcement date to study the corporate bond issuance in line with former literature (for instance,Liu et al, 2016) Eckbo (1986). has shown that the announcement date is the most appropriate date for such studies since it is the definitive date.8 We only keep companies with 80 percent of trading days over the estimation period so that we have only companies with liquid stocks in the sample.…”