Seasoned Equity Issues and Ownership Concentration in a Closely Held Market: An Alignment Effect Test Free from the Unobserved Firm Heterogeneity Problem

Abstract

Opportunities for controlling shareholders to expropriate minority shareholders come largely from insider information. These opportunities and hence private benefits of control, largely under asymmetric information, can vary substantially across firms even within the same legal environment. As a result, this unobserved firm heterogeneity confounds the alignment effect of ownership concentration in reducing the private benefits. To control for this firm heterogeneity, we use a conditional test based on the valuation shocks of corporate financial decisions that have implications for private benefits. We find that in Hong Kong, rights offers signal large private benefits and control-diluting new issues signal small private benefits. This is consistent with a separating equilibrium suggested by recent research. We also find that controlling ownership cannot predict the flotation method choice but the SEO announcement returns are conditionally and significantly related to the level of controlling ownership (with a negative slope for rights issuers and a positive slope for new issuers). The conditional valuation shock patterns suggest a meaningful tradeoff between the incentives and the opportunities of controlling shareholders to both benefit and expropriate the minority shareholders.

Keywords: Insider Ownership, Private Benefits, Unobserved Firm Heterogeneity, SEO Flotation Method

JEL Classification: G14, G32, G34