Blockholding and Market Reactions to Equity Offerings in China

51 Pages Posted: 23 Dec 2011 Last revised: 6 May 2013

See all articles by William M. Cheung

William M. Cheung

University of Macau

Keith Lam

University of Macau

Lewis Tam

Faculty of Business Administration, University of Macau

Date Written: December 15, 2011

Abstract

We examine the impact of blockholding on shareholders’ wealth in equity offerings in China. We find that investors generally react negatively to equity-offering announcements by firms with high blockholding. A one-standard-deviation (12%) increase in blockholding leads to a 0.59% reduction in firm valuation over a seven-day window and a 5.50% reduction over a two-year period surrounding the announcement. Private (non-governmental) blockholding is associated with a more negative valuation effect than governmental blockholding over the long-term event window. The above result holds only for financially constrained firms but not unconstrained firms. Further analysis shows that firms with private blockholding have greater positive cash-cash flow sensitivity than firms with governmental blockholding, and again, the result holds for financial constrained firms only. Collectively, the findings suggest that equity offerings in China signal the issuers' future financial constraints, but the findings do not support the agency hypothesis of state ownership.

Keywords: blockholding, equity offerings, financial constraints, agency problems, cash flow sensitivity of cash

JEL Classification: G32, G38

Suggested Citation

Cheung, William Ming Yan and Lam, Keith and Tam, Lewis, Blockholding and Market Reactions to Equity Offerings in China (December 15, 2011). Pacific-Basin Finance Journal, 20, 459-482, Available at SSRN: https://ssrn.com/abstract=1976109

William Ming Yan Cheung

University of Macau ( email )

Macau

Keith Lam

University of Macau ( email )

Macau

Lewis Tam (Contact Author)

Faculty of Business Administration, University of Macau ( email )

Room E22-4055, University of Macau
Avenida da Universidade
Taipa
Macau

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