Invisible Hand and Helping Hand : Private Placement of Public Equity in China

In this study of private equity placements (PEPs) in China, we find that Chinese firms' PEPs are issued at a substantial discount and have positive announcement period returns, which is consistent with previous studies using data mainly from the United States and Europe. However, there is a long-term outperformance by PEP-issuing firms, and such long-term abnormal return is even higher when controlling shareholders participate in the deal and the externally raised capital is allocated to asset restructuring and M&A. We further show that firms approved for private placements are financially stronger than those rejected by regulatory authorities. In addition to the benefits accruing to investors, investment efficiency is improved after private placements, especially in firms that had financial constraints to begin with. Overall the evidence suggests that the policy preferences of market regulators influence the allocation of capital to the corporate sector