Historical high prices drive seasoned equity offerings in China
image: From this picture, we can see that the fluctuation ranges of co-movement between SEO fillings and firms with new highs in 2015 and 2016 are smaller than those of 2005–2007. This may be because in 2015, the stock market experienced a bull market, and investor sentiment was relatively high. At that time, fund accounts and securities firms formed with bank capital allocation became dominant in the private placement market, bringing additional stock issuances. To further explore this correlation, we conduct time-series regressions of the number of companies on the aggregate number of issuances.
Credit: Yu Xia (Sichuan Tourism University, Chengdu, China)， Shuxin Guo (Southwest Jiaotong University, China).
Background and Motivation
As the world's second-largest stock market, China's equity financing behaviours have garnered significant attention from global investors and academics alike. In this context, China Finance Review International (CFRI) brings you a groundbreaking study titled “Historical High Prices and Seasoned Equity Offerings: Evidence from China”, which explores how Chinese listed companies time their equity issuances based on historical stock price peaks. The study introduces a novel measure—the anchoring-high-price ratio—to examine whether managers rely on past price highs when deciding to issue additional shares.
Methodology and Scope
The researchers analyse data from China’s A-share market between 1998 and 2020, using both monthly and annual samples. They employ univariate tests, probit regressions, and robustness checks to investigate the relationship between the anchoring-high-price ratio—the ratio of a stock’s current price to its historical high—and the likelihood of seasoned equity offerings (SEOs). The study controls for firm characteristics such as leverage, profitability, size, and market-to-book ratio to isolate the anchoring effect.
Key Findings and Contributions
- Firms are more likely to issue additional shares when their stock prices are close to historical highs.
- Unlike in the U.S., the Chinese market reacts negatively to SEOs announced near price peaks, leading to higher offering discounts and long-term underperformance.
- SEOs timed around historical highs reduce firms’ leverage ratios in the long run.
- The study is the first to apply the anchoring-high-price ratio to China’s SEO market timing, offering a behavioural finance perspective that challenges traditional rational market assumptions.
Why It Matters
The findings reveal significant cognitive biases among managers and controlling shareholders in China, highlighting the role of irrational behaviour in corporate financing decisions. This research enhances the understanding of market timing in emerging markets and highlights the impact of investor structure and ownership types on financial strategies.
Practical Applications
- Investors can better anticipate SEO announcements and market reactions by monitoring historical price levels.
- Corporate managers may reflect on the long-term consequences of anchoring biases in financing decisions.
- Regulators could consider these behavioural patterns when designing policies to improve market efficiency and protect investor interests.
Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original! Open access for a limited time!