Research On The Relationship Between The Private Placement Size And Short-term Market Reaction

With the rapid economic development of China, the need for capital grows more and more huge. Due to the limitations of internal financing, external financing has become the main approach of enterprises seeking money. With the advantage of low threshold, low cost, high efficiency, private placement has been adopted by most enterprises. Since the release, by China Securities Regulatory Commission (CSRC hereafter), of Regulation on Securities Issuance of Listed Companies in2006, private placement has become the top option by listed company for external financing.However, low price securities will be available to trade, after the lock-up period of private placement expires, which would break the supply and demand balance and then create pressure to pull down that corporate’s stock price. This phenomenon is pretty similar to the heated discussion on release of non-tradable share after stock market reform.This article will focus on the relationship between the above private placement size and short-term market reaction, in the year of2011, one year after the lock-up period of the private placement peak year in2006expires. It aims to offer theoretic support to develop regulations on private placement size that helps health of Chinese mainland stock market.The paper is divided into six chapters as follows:Chapter Ⅰ IntroductionThis chapter talked about the background and significance of this study, followed by research thoughts and modeling.Based on hypotheses, this article empirically analyzed from three aspects, the relationship between private placement type and size, the one between private placement size and short-term market reaction, and the one among private placement type, size and short-term market reaction. This was briefly introduced with research thoughts, followed by detailed demonstration through research framework with a technical roadmap to make things clear.Chapter II Literature ReviewThis chapter started with the summary of foreign scholars’articles on Five Theories of Private Placement Announcement, reviewing the monitoring effect hypothesis, the information effect hypothesis, the hypothesis of investment opportunities, the company’s quality hypothesis and the five theory of the price pressure hypothesis. Subsequently, foreign scholars’ articles were reviewed on the relationship between the private placement size and short-term market reaction.Similarly, domestic scholars’research on the private placement announcement effect was reviewed, followed by that on the relationship between private placement type, size, as well as the private placement size and short-term market reaction.Chapter Ⅲ of Theoretical analysisAll relevant concepts involved in this article were defined, mainly based on private placement definition, characteristics, situation in China, private placement type, size definitions, short-term market and short-term market reaction definitions.Secondly, supporting theories were briefed, including supervision effect, information effect, price pressure hypotheses and effectiveness of capital market.Thirdly, the relationship among private placement type, size and short-term market reaction was analyzed and discussed, with the support of foresaid theoretic support. Separate analysis and discussion, on the private placement type, size and private placement size and short-term market reaction, offers logic derivation and theoretic support to the assumptions of this article.Chapter Ⅳ Assumptions and study designThree assumptions focused in this article were made. Then data source and sampling was described with the definitions of relevant variations. Finally empirical analysis unfolds with corresponding models were designed for those three assumptions.Chapter Ⅴ Empirical Analysis Setting the private placement announcement day as the base date, event study methodology was used to empirically analyze the three models within the window period,30days before and after the base date.Several methods have been applied, including descriptive statistics, univariate regression analysis, multivariate regression analysis, and regression analysis involving cross multiply items like private placement size in different private placement type model.Big three assumptions made in this article were well verified and the new relationship between private placement types, size will be discovered as well.Chapter VI Conclusions and Policy RecommendationsThree separate conclusions were drawn in accordance with the foresaid three models, followed by policy recommendations as below:1. Improve the disclosure system of private placement information, detailing the rules regarding the regulation.2. Strengthen supervision of the private placement size.3. Give more attention to the joint effect, of private placement size, corporate size, achievement, Tobin’s Q and market situation, on the short-term market reaction.4. Actively promote private placement with the use of the asset acquisition to achieve the overall listing or backdoor listing.The main contribution of this article1. Novel research aspectDomestic scholars used to focus on private placement announcement effect alone as well as issues like securities discount, interest transfer. It is seldom discussed from the aspect of private place size.In the following year of lock-up period, this article starts with the study of private placement size, and discusses its effect on short-term market reaction. It is good for issuer, investor, regulator to analyze, monitor from a new perspective of private place size.2. New phenomenon discoveredThis article has discussed the relationship between private placement type and size, which has almost not been mentioned before. Through the descriptive statistics of them two, some connection between private placement types, size has been discovered with roughly qualitative relationship between private placement type and size. The discovery of such phenomenon makes this article more innovative.3. Novel study methodologyBesides private placement size as factor No.1, a cross multiply item including other factors that have significant affect over short-term market reaction has been introduced to study how the joint effects of these factors work. Such cross multiply item introduction is innovation in the relationship study of private placement size and short-term market reaction under different private placement types.The limitations of this article1. Small number of samplesIt was not until2006that Regulations on Securities Issuance of Listed Company got released. Time period available for sampling is short, plus my limited capability to collect information, which leaves a small number of samples to study in this article and, to some extent, affects the research result.2. Difficulties to collect the data neededIt is difficult, in the public disclosure of listed company’s balance sheet, to find the liabilities book value matching the private placement announcement date, which would result in errors in the calculation of its market value on that day. There is a lot of relevant missing in the CSMAR database, creating more difficulties for data collection.3. Macro-economy policy affects the data in time period chosenThe sampled time period contains the year2008in which global financial crisis happened. The data of2008would show big difference vs. other years. Meanwhile, to defend our own economy, Chinese government released a bailout plan which shifted the macro-economy policies. In the recovery period that followed, some data would have been affected by those policies, which reduced the objectivity.Future research trend of this study1. To assess the most appropriate private placement size, in accordance with different private placement type2. To differentiate the model with various industries that may be different from one another...