Securities Market Regulation and Private Equity Placements in China

The extant literature in securities issuance has documented two important facts on private placements of equity securities (PEP): positive short-term market reaction to PEP announcements and long-term underperformance of issuing firms. In this study, we investigate the impact of PEP regulation on the post-PEP stock performance of Chinese listed firms: whether the more stringent regulation of private equity placements in China serves as a control mechanism that reduces information asymmetry or serves as a friction that results in managerial entrenchment and investment inefficiency. We find that, consistent with previous studies using data mainly from the United States and Europe, Chinese firms’ PEPs are issued at a substantial discount and have positive announcement period returns. However, both long-term operating and equity performance of PEP-issuing firms also improve compared to non-issuing firms. More importantly, general investors benefit from private placements when controlling shareholders participate in the deals, and at the same time, long-term returns to controlling shareholders outperform those to non-controlling shareholders. Overall, this evidence suggests that stricter regulation does not necessarily eliminate underpricing and entrenchment, but it does help firms to obtain needed capital and improve investment efficiency in the long run.