| This paper investigates the post-issue operating performance of listed companies conducting rights issue. My analysis uses a sample of 525 companies listed on Shanghai and Shenzhen stock market that issued rights during the 1996—2003 period and uses Paired-Sample T Test to examine the changes in operating performance. It was found that the operating performance decreased sharply for the first year and second year after the issue comparing to the performance prior to the issue. Further, my study examines the operating performance of those listed companies which have much longer period of return on investment for 5 years following the issue and they also exhibited declining operating performance.I have developed the explanation that binary ownership structure in Chinese listed companies is the underlying factor that contributes to the underperformance of firms conducting rights issue. There are four direct reasons: 1) Pre-issue earnings were manipulated to make sure that the company can be qualified to issue rights. 2) Pre-issue and post-issue related party transaction. 3) Projects which the money raised by rights issue was invested in were changing frequently. 4) Unwonted debt ratio.I also found that the implementation of full listing plan launched by China Securities Regulatory Commission in 2005 has brought positive influence on the optimization of behavior of rights issue. Listed companies will be more rational in conducting rights issue, use debt financing to optimize their capital structure and pay more attention to corporate governance to improve operating performance.Finally, the paper puts forward suggestions on how to optimize the behavior of rights issue of Chinese listed companies. |
