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

37 Pages Posted: 9 Mar 2005

See all articles by Xueping Wu

Xueping Wu

City University of Hong Kong (CityU) - Department of Economics & Finance

Zheng Wang

City University of Hong Kong (CityU) - Department of Economics & Finance

Date Written: March 2005

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

Suggested Citation

Wu, Xueping and Wang, Zheng, Seasoned Equity Issues and Ownership Concentration in a Closely Held Market: An Alignment Effect Test Free from the Unobserved Firm Heterogeneity Problem (March 2005). Available at SSRN: https://ssrn.com/abstract=678802 or http://dx.doi.org/10.2139/ssrn.678802

Xueping Wu (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 3442 7577 (Phone)
+852 3442 0195 (Fax)

HOME PAGE: http://personal.cityu.edu.hk/~efxpwu/

Zheng Wang

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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