A Study On Private Equity Placements And Tunneling In China

Private equity placements is a flecible and elastic way of the equity refinancing in Chinese capital market after the non-tradable reform finish. It once rolls out to get the favour of the listed companies and market. It becomes the most important equity refinancing way of the listed companies in full circulation time. The private equity placements aim of the listed companies is not only to raise funds, but also to realize the complete listing through the private equity placement for the controlling shareholders, actual controlling shareholders and their controlling companies using their assets to subscribe for shares. However, there is lockup period of the subscription object subscribing for shares, such as the controlling shareholders, actual controlling shareholders and their controlling companies. The longer of the lockup period is, the higher risk and loss of the stock price fluctuations is. Therefore, the controlling shareholders et al. seeks the additional way in order to compensate the market risk and loss of the stock price fluctuations. In China, there is more serious tunneling because of the special equity structure and institutional environment, especially the controlling shareholders et al. seeks the additional way in order to compensate the market risk and loss in the process of the private equity placements. Based on the overview of research on agency problems between the large and minority shareholders, tunneling and the tunneling problems in the process of private equity placements at home and abroad, and rooted in China’s unique institutional background, this paper explores the tunneling in the process of private equity placements from the perspectives of cash dividend, cash embezzlement and overinvestment, and makes the three empirical tests. These empirical tests are helpful for understanding the tunneling problems in the process of private equity placements and making a reference for improving the efficiency of raising funds.With a sample of listed companies which have achieved private equity placements during the period of May8,2006-Dec31,2009on Shanghai and Shenzhen stock exchanges, this paper examines the relationship between private equity placements and cash dividend payout in listed companies which have achieved private equity placements. We find that the Chinese listed companies payout more cash dividend after private equity placement achieved than those unachieved; the companies with the large shareholders participating in the private equity placements payout more cash dividend than the companies without the principal shareholder partaking. These results indicate that the companies controlled by the large shareholders have significant tunneling preferences on cash dividend policies.This paper examines the cash embezzlement problems after the large shareholders participating in the private equity placements. Using a sample of286listed companies which have achieved private equity placements during the period of May8,2006-Dec31,2010on Shanghai and Shenzhen stock exchanges. We find that the cash embezzlement of the companies with the large shareholders participating in the private equity placements is more serious than the companies without the principal shareholder partaking. This result indicates that the companies controlled by the large shareholders have significant tunneling preferences through taking up the cash of the listed companies and minority shareholders.Based on a sample of listed companies which have achieved private equity placements during the period of May8,2006-Dec31,2009on Shanghai and Shenzhen stock exchanges, this paper examines the relationship between private equity placements and investment efficiency in listed companies, which have achieved private equity placements.The results show that the Chinese listed companies are more likely to be occurrence of overinvestment after private equity placement achieved than those unachieved; the overinvestment of the companies is easier to damage the operating performance after private equity placement achieved than those unachieved; the companies with the large shareholders participating in the private equity placements are more likely to be occurrence of overinvestment than the companies without the principal shareholder partaking. These results indicate that the companies controlled by the large shareholders have significant tunneling preferences through the implementation of the beneficial investment project for themselves to snatch the private benefits.The results confirm that there are serious tunneling problems of the private equity placements. There are not only long suspension, manipulating the benchmark price, discounting price before the private equity placements achieving, but also cash dividend, fund appropriation and overinvestment after the private equity placements achieving. This paper not only deeply extends the theoretical study on the tunneling problems in the process of the private equity placements, but also provides valuable empirical evidences to improve the supervision system of the regulator and promote the healthy development of the capital market in China.