Underwriting decisions, shareholder participations, and investor identities: three essays on seasoned equity offering

This dissertation is composed of three independent yet thematically integrated research papers that investigate various aspects of seasoned equity offerings (SEOs) in the Hong Kong and Chinese stock markets. In general, the underwriting decisions of rights issues in Hong Kong Exchanges and Clearing Limited (HKEX) are discussed in the first research paper; the second research paper examines how participation rate and wealth transfer relate to the long-term stock performance of Chinese rights-issuing firms; and the third research paper investigates the determinants of Chinese issuing firms’ long-term stock performance when private placements are issued to different identities of investors and examines the issuers' price management mechanisms. While each paper addresses several distinct research questions, they share a common objective of providing valuable insights into seasoned equity offering strategies by examining issuing firms’ financing motivations, investor behaviour, and market mechanisms, thereby offering theoretical and practical implications for issuers, investors, and regulatory authorities. The first paper seeks to explain why a large number of issuers in the Hong Kong stock market still choose to have their rights issues underwritten despite the removal of mandatory full underwriting requirements since the third quarter of 2018. These issuers are required to disclose the intended use of proceeds in their rights issue announcements. Our findings indicate that rights issuers who intend to raise funds for debt repayment are particularly concerned about the guaranteed receipt of proceeds and demonstrate a strong preference for securing underwriting services from investment banks. We further highlight that the debt structure of issuing firms plays a crucial role in their intention to use the proceeds for debt repayment. Specifically, firms with high leverage and substantial short-term debt obligations generally have urgent funding needs, driving them to raise funds through rights issues to repay their debt. Unlike the take-up rate, the participation rate reflects the actual involvement of existing shareholders in rights issues. When existing shareholders give up their rights to subscribe to new shares at a discount or do not fully subscribe to their pro-rata shares, these lead to a lower participation rate and an inevitable wealth transfer occurs from non-participating shareholders to participating shareholders. Compared with price discounts, the wealth transfer can better capture the interplay between price discounts, offer size, and participation rates in rights issues. The second paper investigates the association of participation rates and wealth transfers with issuing firms’ long-term stock performance, and we find that rights issues with higher shareholder participation rates and lower wealth transfers tend to exhibit superior long-term stock performance. Existing shareholders can play a certification role; therefore, both their participation rate and the wealth transfer among them convey credible information about the future stock performance of issuing firms. This offers a novel perspective for understanding the stock performance of firms conducting rights issues. The third paper examines the long-term stock performance and potential stock price management associated with private placements in the Chinese stock market, with a particular focus on investor identity. Building on prior studies that have attempted to classify investor identities in various ways, this paper introduces a refined categorization that distinguishes among individual investors, strategic investors, and financial institutional investors, providing a more nuanced understanding of their differential impacts on long-term stock performance. The results show that private placements involving existing managers and financial institutional investors who are also the existing major shareholders are associated with a certification effect, whereas those involving strategic investors leading to the emergence of a controlling shareholder exhibit a monitoring effect. In the context of the Chinese stock market, where the China Securities Regulatory Commission (CSRC) imposes strict restrictions on discount rates and lock-up periods, issuers have strong incentives to engage in stock price management to implicitly compensate investors. Despite regulatory constraints, issuers retain flexibility in selecting the pricing benchmark day, which enables them to influence stock prices prior to issuance. This study thus further investigates whether firms strategically manage the timing of firm-issued news items disclosure to influence stock prices and examines the subsequent two-year stock performance following private placements. We find that issuers manage the timing of news releases around the pricing benchmark day to depress stock prices beforehand and inflate them afterward, thereby enabling investors to obtain greater implicit discounts. This study contributes to the literature by offering a more detailed investor classification and uncovering the mechanism of stock price management in Chinese private placements.