Short-Term Performance

Our third hypothesis is an extension of Hypothesis 2. Our logic proceeds as follows. High government ownership introduces inefficiencies which lead to poor performance. Because of the poor performance record, a firm with high government ownership will prefer the rights offering method to public placement. Consequently, the firms issuing rights offering will receive lower abnormal returns than their public- offering counterparts. To test this hypothesis, we examine the abnormal returns at the announcements of the issuance of the two offering methods. We apply the conventional event study methodology for this purpose. The abnormal returns are calculated using the market model parameters estimated over a 220-day period ending 21 days before the announcement date (as estimated by Eckbo and Masulis, 1992). The results are reported in Tables 9 and 10. Table 9 reports the abnormal returns for rights offering

Table 9:Cumulative abnormal returns for a sample of 378 Rights offering firms during the period 1993- 1998. The ROs are identified from the Chinese Rights Offerings database. (CSMAR). Abnormal returns are calculated using the market model parameters estimated over a 220-day period ending 21 days before the announcement date. The Chinese stock market’s equally weighted index is used in the market model to compute betas. The abnormal returns are calculated in the intervals. The Wilcoxon signed rank test for the differences in medians appears in the last column.

Cumulative abnormal returns for RO firms

Interval Mean % Z – statistic Median % Signed rank test

-5 , -1 -0.74 -1.543 -0.45 -874.50 -1 , 0 -2.51 -10.369a _{-1.54 -4589.50} a 0 -2.19 -14.547 a _{-0.98 -4236.50} a -1 , +1 -3.54 -10.347b _{-2.14 -5147.50} a +1 , +5 -0.27 -1.0551 d _{-1.05 -2365.50} c -10 , +1 -2.19 -7.364 a _{-3.54 -4572.50} a -10 , +10 -2.84 -8.254 a _{-4.58 -4258.50} a

a _{significant at 0.1%} b _{significant at 1%} c _{significant at 5%} d _{significant at 10%}

Table 9 shows that announcement effects of the rights offering are consistently negative and statistically significant. The cumulative abnormal return (CAR) for the window of (-1, 0), a window often reported by researchers is -2.51% and is significant at the 0.1% level.

The results are quite opposite, as Table 10 demonstrates, when a firm chooses public offering. CARs are positive and significant for all windows. CAR for the (-1, 0) window is 7.58% and significant at the 0.1% level.

Table 10: Cumulative abnormal returns for a sample of 22 Public offering firms during the period 1993- 1998. The POs are identified from the Chinese Rights Offerings database. (CSMAR). Abnormal returns are calculated using the market model parameters estimated over a 220-day period ending 21 days before the announcement date. The Chinese stock market’s equally weighted index is used in the market model to compute betas. The abnormal returns are calculated in the intervals. The Wilcoxon signed rank test for the differences in medians appears in the last column.

Cumulative abnormal returns for the PO firms

Interval Mean % Z – statistic Median % Signed rank test

-5 , -1 5.12 14.214a _{4.98 3541.50}b -1 , 0 7.58 71.547a _{6.78 4102.50} a 0 4.56 61.247 a _{3.41 4431.50} a -1 , +1 11.36 54.254 a _{9.68 5197.50} a +1 , +5 3.02 10.369 a _{2.11 2476.50} d -10 , +1 27.36 41.367 a _{18.54 7849.50} a -10 , +10 24.31 47.256 a _{17.63 7852.50} a

To summarize the results in Tables 9 and 10, investors in Chinese firms react negatively to rights offering and positively to underwritten public offerings. The results are consistent with our third hypothesis H3 and clearly indicate that the rights offering signals bad news, while public offering signals good news to investors. This finding is of particular interest because opposite finding appear to prevail for the non-Chinese firms. A large number of studies on U.S. firms have shown that SEOs are associated with negative abnormal returns, especially when the method used is firm commitment

underwritten offer. On the other hand, studies (Kang and Stulz, 1996 and Bøhren, Eckbo

and Michalsen, 1997) document positive abnormal returns to uninsured rights issues in other countries. The unique ownership structure of Chinese firms might explain this contradiction.

In Table 11, we validate our finding in Tables 9 and 10 that negative (positive) abnormal returns of rights offering firms (public offering firms) are related to the extent of government ownership in Chinese semi-privatized firms. To explain the abnormal returns surrounding SEO issue announcements, we estimate the cross-sectional regression using Generalized Least Squares (GLS) where the dependent variable is the cumulative abnormal return over the window (-1, 0). We estimate 3 different models of the equation to assess the effect of different variables on the stock price.

Table 11: GLS regression to explain the valuation effect of the SEO announcement a sample of 400 SEOs with 378 Standby Rights Offerings (ROs) and 22 Underwritten Public Offerings (POs) during the period 1993-1998. The dependent variable is an the cumulative abnormal return during the two-day announcement window CAR(-1,0). The independent variables are: MANOWN is the percentage shares held by managers, FIVEMAJ is the percentage of shares held by the five major shareholders including institutional and private investors but excluding the government. GOV is the percentage of shares held by the government. NESSEX is the ratio of non-essential expenditures over total expenses. SEOP is the logarithm of the net proceeds from the SEO. SHARE is the ratio of the number of shares offered to the number of shares outstanding prior to the offer. STD is the standard deviation of stock returns calculated over a period from 125 days before the announcement to 125 days after the announcement. DUMMY is an indicator variable equal to 1 if it is a RO and 0 if it is a PO. The p-values are reported under each coefficient in the parentheses.

Regression 1 Regression 2 Regression 3

Intercept 0.759 0.187 0.107 (0.211) (0.164) (0.157) MANOWN 0.137 0.096 0.104 (0.248) (0.305) (0.281) INST 0.169 c _0.147b _0.106 b (0.074) (0.036) (0.041) GOV -0.039 b _-0.024 b _-0.025 b (0.031) (0.018) (0.021) NESSEX -0.057 -0.007 -0.007 (0.549) (0.517) (0.274) SHARE 0.147 (0.194) STD -0.687 (0.247) DUMMY -0.516a _-0.368 a _-0.321 a (0.000) (0.000) (0.000) R2 _{0.348 0.324 0.218}

a _{significant at 1%} b _{significant at 5%} c _{significant at 10%}

Three variables that affect announcement returns are the government ownership concentration, institutional holding, and the dummy variable representing the method of external equity financing. Government ownership and rights offering negatively affect, while institutional holding positively affect announcement returns. In summary, higher ownership by the government destroys value, but higher institutional ownership creates value. The results support hypothesis 3.