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Ownership Concentration, Adverse Selection and Equity Offering Choice
BibTeX
@MISC{Cheung_ownershipconcentration,,
author = {William Cheung and Keith Lam and Lewis Tam},
title = {Ownership Concentration, Adverse Selection and Equity Offering Choice},
year = {}
}
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Abstract
Previous studies document inconsistent results on adverse selection problem in equity offering choice. We argue that the inconsistent results are driven by measurement problems and the lack of a clean sample for testing. This paper examines a sample of equity offerings in China, which are characterized by two special institutional features. First, the largest shareholder, the state owner commits not to subscribe shares in rights offerings. Second, the subscription ratio in rights offering is capped by the regulator. As opposed to previous studies, we argue that high ownership concentration is associated with high adverse selection problem for rights offerings, in this particular setting. This paper presents a simple framework for the equity offering choice (rights versus public) and firm valuation with respect to firm ownership concentration, with these two features incorporated. We empirically test the model implications and three patterns emerge. First, investors revise values of rights offering firms downward for those with high ownership concentration. Second, public offerings are associated with more negative abnormal returns than rights offerings but the dispersion in abnormal returns between the two converges with increasing ownership concentration. Third, firms tend to choose public offerings when they want to raise a larger amount of fund. Additional tests show that corporate managers do consider costs and benefits when they make their choices on offering methods.
Keyphrases
ownership concentration equity offering choice right offering adverse selection inconsistent result public offering previous study high ownership concentration model implication subscription ratio simple framework negative abnormal return measurement problem clean sample additional test high adverse selection problem abnormal return adverse selection problem state owner commits right offering firm particular setting firm valuation corporate manager equity offering special institutional feature
