The effect of private placement on investment efficiency: Empirical evidence from the new refinancing regulations

• Main Author: HAN, Zhiyong
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: new refinancing rules; private placement; inefficient investment; DID model; Accounting; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/etd_coll/649; https://ink.library.smu.edu.sg/context/etd_coll/article/1647/viewcontent/GPBF_AY2024_PhD_Zhiyong_HAN.pdf
• Institution: Singapore Management University

Compared with public offerings, private placements are more attractive to investors due to a lower threshold, a simpler procedure, and a higher success rate of issuance. These advantages make private placements the preferred choice for listed companies seeking to issue additional shares in many capital markets. With the increased prevalence of private placements as a refinancing method, how to effectively leverage raised funds and improve investment efficiency has emerged as a topic under discussion within the academic community. However, whether private placements can affect investment efficiency remains controversial. Moreover, previous studies lack systematic empirical evidence, and endogeneity issues hinder an in-depth exploration of their relationship. Therefore, it is imperative to systematically explore the effect of private placements on investment efficiency. This paper seeks to explore the effect of private placements on investment efficiency along with the underlying mechanism via a quasi-natural experiment based on the new refinancing regulations introduced in 2020. The study focuses on A-share listed companies in China from 2017 to 2022, employing methodologies such as literature review, statistical analyses, and empirical research. The paper proceeds as follows: firstly, it introduces the background of the new refinancing regulations issued by the China Securities Regulatory Commission (CSRC) in 2020, and discusses the schools of thoughts on investment efficiency in the context of increased fundraising opportunities. Subsequently, it raises the main research question of whether private placements can affect investment efficiency under the new refinancing regulations; secondly, it reviews existing literature on private placements and their effect on investment efficiency and identifies the theoretical argument; thirdly, it analyzes the characteristics of the private placement system and investment efficiency of Chinese listed companies; finally, it explores the effect of private placements on investment efficiency alongside the underlying mechanism under the new refinancing regulations, obtains empirical evidence regarding this effect, and on this basis, provides policy suggestions that support enterprises in China in conducting efficient investments through private placements. The main conclusions of the paper are as follows: (1) Since the implementation of the new refinancing regulations, private placements by Chinese listed companies have exhibited the following characteristics: an increase in issuance quantity, a rise in the amount of raised funds, dominance in seasoned equity offerings (SEOs), and a large proportion of project financing. Analyses of inefficient investment behaviors under the new refinancing regulations reveal that Chinese listed companies generally engage in inefficient investments, primarily reflected as underinvestment. Moreover, the extent of inefficient investments of listed companies during the relaxing period under the 2020 new refinancing regulations is significantly lower than in other periods; (2) Private placements under the new refinancing regulations have significantly curbed inefficient investments. The conclusion remains robust through a series of tests, such as replacing core dependent variables, mitigating endogeneity with independent variables lagged by one period, and excluding the continuation of previous policy effects. Private placements reduce the inefficient investments of listed companies by alleviating information asymmetry and reducing agency costs; (3) Compared with private placements by listed companies with state-owned controlling shareholders, those by companies with non-state-owned controlling shareholders can more effectively curb inefficient investments. In comparison with private placements by listed companies with low financing demand, those by companies with high financing demand can significantly reduce inefficient investments. Furthermore, private placements for project financing can more effectively inhibit inefficient investments. This paper enriches the literature on enterprise investment efficiency in the context of specific private placement policies and provides systematic evidence on the relationship between private placements and investment efficiency. Additionally, it sheds light on the effect of China's 2020 new refinancing regulations on investment efficiency, and provides insights that could contribute to China's private placement regulation and reform.