انتخاب بین ارائه حقوق و سهام نوشته شده: شواهدی از بازار بورس چینی

We study the choice and valuation effects of alternative flotation methods using a sample of Chinese firms that must meet the return on equity (ROE) thresholds set by the government to raise equity capital. The ROE requirement, although changed over time, seems to play an important role on the valuation and performance of seasoned equity offerings. The analysis of 219 rights and 75 underwritten offerings between 2000 and 2004 shows that Chinese firms that are not qualified for the flotation method with a higher ROE requirement suffer the most at announcement and experience significantly lower buy-and-hold abnormal returns than those that are qualified. Our results suggest that the freedom to choose their preferred flotation method may be valuable to firms that meet the higher ROE requirement. Finally, our probit models identify several determinants of the choice of flotation methods.

The choice between rights and underwritten equity offerings has been a topic of interest to financial economists since the publication of Smith (1977). Most studies have centered on the ‘rights offering paradox’ issue1 as Smith (1977) and Eckbo and Masulis (1992) show that the direct flotation costs of rights offerings are lower than those of public underwritten offerings, but fewer than 10% of U.S. firms issue seasoned equity directly to existing shareholders through rights offerings. In those studies, firms are free to choose flotation methods. However, what if firms do not have the luxury of selecting rights or underwritten offerings? In China, due to unique regulatory requirements, firms may not have the freedom to choose their preferred flotation methods, providing a great opportunity to study the choice as well as the valuation effects of alternative methods. In the Chinese stock markets, a rights issue used to be the only source to raise seasoned equity capital, but underwritten public offerings have emerged since 1998. The number of underwritten issues has increased significantly and surpassed that of rights offerings for the first time in 2002, consistent with the international trend. According to the Chinese security regulation, before March 28, 2001, a listed firm may issue rights only if its ROE is above ten percent in each of the three most recent years, whereas no such requirement exists for underwritten offerings. By identifying and studying the three groups of firms – firms that issued rights, firms that were qualified for rights but issued underwritten offerings, and firms that were not qualified for rights offerings so issued underwritten offerings – we provide insights to the choice of flotation methods and the corresponding market responses. From March 28, 2001 to June 20, 2002, the ROE requirement was six percent for both rights and underwritten offerings. During this particular period, qualified issuing firms had the opportunity to choose their preferred flotation method. However, starting on June 21, 2002, the ROE requirement was raised to ten percent for underwritten offerings whereas the requirement for rights issues remained at six percent. Because of this regulation, in this period, three groups of firms – firms that issued underwritten offerings, firms that were qualified for underwritten offerings but issued rights, and firms that were not qualified for underwritten offerings so issued rights – can be identified and examined. The results from this analysis along with the evidence obtained from groups during earlier periods provide us with a better understanding of the choice of flotation methods and the valuation effects. Although a trend toward a greater use of underwritten offers is evident in a number of countries, the valuation effects of announcements of seasoned equity issuances do not seem to be internationally consistent. International comparisons of flotation methods are interesting because the relative frequencies of rights and underwritten offerings differ substantially across countries. Existing theories do not provide a convincing story to explain the cross-country variation on the choice of flotation methods. In addition, empirical evidence on valuation effects of seasoned equity issues is mixed. For example, Slovin et al. (2000) study the flotation methods in the United Kingdom and find that placings (a form of public securities issuance comparable to the U.S. firm commitment offering) generate a significantly positive two-day excess return of 3.3%, contrary to the negative returns observed in the U.S. markets. BØhren et al. (1997) also find that the two-day abnormal announcement return is significantly positive for uninsured rights issues on the Oslo Stock Exchange, again contrary to the U.S. evidence. Using a sample of 219 rights offerings and 75 public underwritten offerings in Chinese stock markets during 2000–2004,2 we find negative announcement-day returns, consistent with information-based models of equity issuance (see e.g., Myers and Majluf, 1984). Our empirical evidence is also consistent with findings reported in the literature (see e.g., Mikkelson and Partch, 1986 and Eckbo and Masulis, 1992). When the ROE requirement for rights offerings is stricter, the market-adjusted announcement day return for firms that meet the higher ROE requirement and issue rights offerings is not significantly different from zero. When the ROE requirement is stricter for underwritten offerings, firms issuing underwritten offerings have a median excess return of −1.32%. During the same period, firms that issued rights offerings have a median excess return of −2.21% (−3.43%) if they meet (do not meet) the higher ROE requirement. This result suggests that firms that choose a flotation method with lower ROE requirement suffer the most from the announcement of equity offerings. To study the cross-sectional variation of announcement-period abnormal returns of rights and underwritten equity offerings across issuing firms, we run OLS regressions that control for several documented variables. Firms that issue rights offerings tend to experience lower announcement-period abnormal returns than firms that issue underwritten offerings. However, once control variables are included, the lower abnormal returns for rights offerings are no longer significant. Firms that are not qualified for the flotation method with a stricter ROE requirement suffer the most at announcement. Over the 1-year and 2-year periods after offerings, issuing firms significantly underperform the market, consistent with findings in the literature (see e.g., Loughran and Ritter, 1995 and Pastor-Llorca and Martin-Ugedo, 2004). Firms that issue rights offerings are associated with higher 1-year and 2-year buy-and-hold abnormal returns (BHARs) than firms that issue underwritten public offerings. This result supports Heinkel and Schwartz (1986) that high quality firms use rights offerings while low quality ones adopt public underwritten offerings. The better quality of rights offering firms leads to a better post-offering stock performance when favorable private information materializes following the offerings. Our result is also consistent with Capstaff and Fletcher, 2011 finding from the U.K. that rights offering firms perform better than firms that use other flotation methods. Firms that are not qualified for the flotation method with a stricter ROE requirement, all else equal, have a 16.72% (14.14%) lower 6-month (1-year) BHAR than firms that qualified for the stricter flotation method. The average ROE in the three years before the offerings has negative relations with the post-issue BHARs, but the relation is not statistically significant. In other words, although meeting the ROE requirement is important, a high ROE before the security issuance is not necessarily a good indication of post-offering stock performance. Our overall results suggest that the ROE requirement, although changed over time, plays an important role on the valuation of seasoned issues at announcement and the post-issue stock performance. The ROE per se does not seem to have significant impact on the abnormal stock returns observed at announcement and after issuance. However, whether a company meets the higher ROE requirement set by the market regulator is a critical factor. In other words, not meeting the higher ROE requirement sends out a bad signal to the market as reflected by the negative abnormal return at announcement. Furthermore, firms that do not meet the higher ROE requirement experience worse stock performance, up to one year after the issuance, than those that meet the requirement. It is not clear, however, whether the market regulator has the ability to screen out potential losers by setting an appropriate ROE requirement or investors simply have too much faith on the regulator and act accordingly. Future studies are needed to provide more insights. However, our evidence shows that the freedom to the choice of flotation methods obtained by firms meeting the higher ROE requirement seems valuable. Our probit models identify possible determinants of the choice of flotation methods. We find that firms with lower relative proceeds, smaller market cap, and lower percentage of non-tradable shares are more likely to issue rights offerings. In China, certain industries are protected by the government. We find that firms in the protected industries are more likely to issue rights offerings. Although our evidence may be unique to China, we believe our findings are relevant as, for various reasons, countries often protect certain industries. This study contributes to the literature in several ways. First, by studying a market where some firms do not have the freedom to choose their preferred flotation methods, we extend the existing literature to allow for variation in available flotation methods across firms. To our knowledge, we present the first empirical evidence on the value associated with the freedom to choose flotation methods. Second, our empirical evidence from Chinese markets supports the negative announcement-day return and long-run underperformance documented in the SEO literature (see e.g., Mikkelson and Partch, 1986 and Loughran and Ritter, 1995). In a related study, Bo et al. (2011) investigate the SEO behavior and find that Chinese firms behave similarly to their counterparts in other countries. Third, we identify possible determinants of the choice of flotation methods. Some factors are unique to the Chinese markets, but others are relevant to other countries. Lastly, the lack of freedom to choose a preferred flotation method is a result of government regulation, which is viewed as a form of friction in the literature. Chen et al. (2011) show that government intervention distorts investment behavior and harms investment efficiency. However, we find that firms that meet the higher ROE requirement set by the government, and thus have the freedom to make their flotation choice, perform better than those that do not meet the requirement, indicating that government intervention in SEOs may not be as bad as other regulations. The layout of the paper is as follows. In the next section, we provide institutional background of the Chinese stock markets. Section 3 describes the sample and data. Section 4 contains empirical results of event studies and cross-sectional regressions. Section 5 concludes.

The ‘rights offering paradox’ has been documented in the literature. However, there is currently insufficient evidence to suggest that any of the alternative explanations can resolve the paradox. Furthermore, existing theories do not provide a convincing story to explain the cross-country variation on the choice of floatation methods. Although rights issues are rare in the U.S., they are more popular in Canadian, European, and most Pacific Basin financial markets. To the extent that managers of a firm know which flotation method is more appropriate and choose the preferred method accordingly, the rights offering paradox may simply be a result of an aggregate of optimal choices of flotation methods. Although rights offerings are less costly, they might not be appropriate for all firms. In the U.S. and most markets in the world, firms have the freedom to choose their preferred flotation methods. In the U.S., in equilibrium, less than 10% of the firms are suitable for rights offerings. In the U.K., on the other hand, rights offerings seem more appropriate for most firms. To our knowledge, we provide the first empirical evidence on the choice of flotation methods given regulatory constraints. Using a sample of 219 rights offerings and 75 public underwritten offerings during 2000–2004, we find a negative announcement-day return, which is consistent with information-based models of equity issuance. After controlling for documented variables, we find that firms issuing rights offerings experience lower announcement-period abnormal returns than firms issuing underwritten offerings. Firms that are not qualified for the flotation method with a stricter ROE requirement suffer the most at announcement. Over the 1-year and 2-year periods after offerings, issuing firms significantly underperform the market. Firms that issue rights offerings are associated with higher 1-year and 2-year BHARs than firms that issue underwritten public offerings. Firms that are not qualified for the flotation method with a stricter ROE requirement, all else equal, have a 14.14% lower 1-year BHAR than firms that are qualified for the stricter flotation method. These results represent additional international evidence on the choice between rights and underwritten public offerings. While our results are primarily consistent with the findings in the literature, we find an interesting result unique to the Chinese stock markets. The ROE requirement in China plays an important role on the valuation of seasoned issues at announcement and the post-issue stock performance. The ROE per se does not seem to have significant impact on the abnormal stock returns observed at announcement and after issuance. However, whether a company meets the higher ROE requirement set by the market regulator is a critical factor. In other words, not meeting the higher ROE requirement sends out a bad signal to the market as reflected by the negative abnormal return at announcement. Furthermore, firms that do not meet the higher ROE requirement experience worse stock performance than those that meet the requirement up to one year after the issuance. It is not clear, however, whether the market regulator has the ability to screen out potential losers by setting an appropriate ROE requirement or investors simply have too much faith on the regulator and act accordingly. Future studies are needed to provide more insights. However, our evidence shows that the freedom to the choice of flotation methods obtained by firms meeting the higher ROE requirement seems valuable. Another important aspect that relates to the earnings management by firms issuing seasoned equities in China is worth examining in future studies. Because listed firms in China are required to achieve a minimum ROE of 10 percent in each of the previous three years before they could apply for permission to issue rights from 1996 to 1998, firms that rely on rights offerings to raise additional capital have strong incentives to manage their earnings to meet the requirement. Chen and Yuan (2004) and Haw et al. (2005) examine a sample of listed Chinese firms from 1996 to 1998 and find evidence that Chinese firms manage earnings to meet regulatory requirements for issuing rights. However, they also find that Chinese regulators and investors adjust for the lower quality of managed earnings when making their regulatory and investment decisions, respectively, indicating that they are able to see through the veil of earnings management. However, earnings management by firms issuing underwritten public offerings remains unexamined. Future studies are encouraged for this line of research.