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Understanding seasoned equity offerings of Chinese firms

⇑
Hong Bo a, Zhongnan Huang a, Changyun Wang b,
a
Department of Financial & Management Studies, SOAS, University of London, London, UK
b
China Financial Policy Research Center, Renmin University of China, Beijing, China

articleinfo
abstract
Article history:
Received 25 August 2009 We examine the empirical relevance of standard theories explaining the motivation of Seasoned Equity
Accepted 17 September 2010 Offerings (SEOs) in the Chinese context. Analyzing Chinese SEOs during 1994–2008 and controlling for
Available online 12 October 2010 other factors reflecting features of Chinese corporate finance, we find that Chinese SEOs are mostly
moti- vated by timing the market. Financing for investment and growth receives weak empirical
JEL classification: support. We do not obtain any consistent evidence supporting both the tradeoff and the agency theories.
G30 In addition, we find that the firm’s SEOs behavior varies between rights issues and public offerings and
G32 across differ- ent periods along with the progress of China’s market transition. Our results show that
Chinese listed firms in general behave similarly as their counterparts in other countries concerning SEOs
Keywords: decisions in that they issue SEOs when there are opportunities to take advantage of market
Seasoned equity offerings
overvaluation. These results are consistent with the well-documented convergence trend of corporate
Chinese listed firms
SEOs behavior of firms around the world. In addition, our findings challenge the conventional
Market timing
perception on Chinese SEOs that controlling shareholders use SEOs as a means to expropriate minority
shareholders.
© 2010 Elsevier B.V. All rights reserved.

wangchy@ruc.edu.cn (C. Wang).

1
Henderson et al. (2006) put China into the category of ‘‘Other Asia” together with
1. Introduction other 17 countries/regions and use aggregate data in their empirical analyses.

Recent research documents the convergence of corporate

Seasoned Equity Offerings (SEOs) behavior around the world. For
example, Henderson et al. (2006) examine equity financing behav-
ior using worldwide country/region level aggregate data during
1990–2001 and report a trend of increasing international equity
issuance. Moreover, these authors document that an important
explanation of SEOs behavior in the literature based on mature
capital markets (mainly US and UK), i.e., timing the market, is a
global phenomenon. Kim and Weisbach (2008) investigate motiva-
tions for public equity offerings from 38 countries during 1990–
2003. By examining the ultimate usage of capital raised, these
authors provide evidence that some standard theories explaining
the motivation of SEOs, such as financing for invest- ment, timing
the market, are applicable to SEOs across different countries. The
evidence provided by this stream of research sup- ports
international convergence of corporate equity financing behavior.
However, the mainstream research on the convergence of SEOs
behavior does not include China (e.g., Henderson et al., 2006; Kim
and Weisbach, 2008).1 Although SEOs share a lot of

⇑ Corresponding author. Tel.: +86 10 82509275; fax: +86 10 82509289.

E-mail addresses: hb22@soas.ac.uk (H. Bo), zh1@soas.ac.uk (Z. Huang),

similarities across countries, little is known whether Chinese
listed firms behave similarly as their counterparts elsewhere. Our
paper aims to fill this gap in the literature.
Chinese SEOs are interesting due to the following reasons:
Firstly, Chinese financial markets are increasingly exposed to
inter- national companies. Since the opening of Chinese A-share
markets to Qualified Foreign Institutional Investors (QFIIs) in
2002, the amount of approved investment increased to USD 30
billion by the end of 2008, and the number of involved
international institu- tions was over 100. Among 1525 firms listed
on the Chinese A-share markets in 2008, there were 26 firms with
foreign inves- tors as major shareholders, 11 firms with foreign
investors as con- trolling shareholders.2 Obviously, China is
0378-4266/$ - see front matter © 2010 Elsevier B.V. All rights
reserved. doi:10.1016/j.jbankfin.2010.09.025
playing an increasingly important role in global financial markets.
Secondly, Chinese SEOs are interesting because Chinese firms are
operating in a transition environment in which both capital
markets and corporate gover- nance system are still different from
those of mature markets. Chinese stock markets and SEOs activities
only emerged at the beginning of 1990s. Examining SEOs activities
in the Chinese stock market provides us with a useful platform to
check how the SEOs
2
Chinese domestic stock markets are segmented in A-share and B-share markets. A-
shares are ordinary shares available exclusively to Chinese citizens and institutions
before the introduction of QFIIs in 2002. B-shares are denominated in US or HK dollar
and designated for overseas investors prior to opening the market to domestic
investors in February 2001. The figures are computed from the CSMAR (China Stock
Market & Accounting Research) database.
1144 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157
behavior of Chinese listed firms has been changed over time along
with the progress of China’s market transition and whether the dif-
ferences in SEOs behavior over time, if any, reflect the
characteristics of China’s market transition.
Although the topic is interesting and important, formal explan-
atory researches focusing on the SEOs behavior of Chinese firms
are scarce, particularly in English academic outlets. Some studies
mention Chinese SEOs but with the research focus rather than
SEOs. For example, Huang and Song (2006) report that more than
50% of financing of Chinese listed firms comes from external
sources, and net equity financing makes up more than 50% of
external financing, suggesting that Chinese firms are mainly using
equity financing, in particular SEOs, as a channel of raising exter-
nal capital. Zou and Xiao (2006) argue that Chinese listed firms
have built-in incentives for raising equity due to tight regulations
on SEOs and agency problems. Among few existing studies on Chi-
nese SEOs, almost all investigate the reasons behind the firms’
hunger for SEOs from an agency theory perspective, explaining
the SEOs behavior by the conflict of interests between controlling
and minority shareholders. A major conclusion drawn from this
stream of research is that SEOs are used by controlling sharehold-
ers as a means to tunnel assets from listed firms (e.g., Aharony
et al., 2000; Jian and Wong, 2004; Lin et al., 2007). Therefore,
the conventional perception based on very few existing studies
on Chinese SEOs is that the dominant motivation for Chinese
listed firms of issuing seasoned equities is to expropriate minority
shareholders by controlling shareholders. Except the agency the-
ory explanation, to our best knowledge, there are hardly any for-
mal studies examining other possible motivations of Chinese
SEOs. Given that SEOs have been the most active financing chan-
nel for Chinese listed firms, it is important to explore beyond the
agency explanation why Chinese listed firms conduct SEOs. We
notice that an obvious drawback of the previous studies is that
the agency explanation is examined in isolation from other possi-
ble motivations of SEOs. In addition, the conclusion that control-
ling shareholders use SEOs as a means to expropriate minority
shareholders lacks direct evidence, i.e., the previous studies fail
to provide direct evidence that the financial sources used in tun-
neling are indeed the capital raised via SEOs. We argue that Chi-
nese listed firms are not exclusively motivated by the
expropriation of minority shareholders by controlling sharehold-
ers, other theories such as financing for investment and growth
and timing the market may be also important. We aim to make
a contribution to the existing literature on Chinese SEOs by broad-
ening our understanding on the motivation of Chinese SEOs from
agency theory to other possible explanations.
We use Chinese SEOs during 1994–2008 to examine the empir-
ical relevance of standard theories explaining the motivation of
SEOs. After controlling for other factors that reflect features of Chi-
nese corporate financing, we find that Chinese listed firms are
mostly motivated by market timing to issue SEOs. Financing for
investment and growth has received weak empirical support.
However, tradeoff theory is not supported by our data. Moreover,
we do not obtain any consistent evidence supporting the notion
that controlling shareholders conduct SEOs to exploit minority
shareholders, which has been claimed in the previous literature
on Chinese SEOs. We provide evidence that market timing is the
most relevant explanation of SEOs behavior in China. In addition,
we also find that the behavior of Chinese SEOs varies between
rights issues and public offerings and across different periods along
with the progress of China’s market transition. Our results show
that Chinese listed firms in general behave similarly as their coun-
terparts in other countries concerning SEOs decisions in that they
issue SEOs when there are opportunities to take advantage of
market overvaluation. Our findings are in support of the well-
documented convergence trend of corporate SEOs behavior of
firms across different countries (e.g., Kim and Weisbach, 2008;
Henderson et al., 2006).
The remaining of the paper is organised as follows. In Section 2
we present a summary of SEOs practice in China, which contains
description on the features of Chinese corporate governance.
Section 3 reviews the related literature, including standard
theories explaining the motivation of SEOs and the related research
on China. We discuss empirical issues in Section 4. Section 5
presents empirical results. Section 6 concludes.
2. The SEOs practice in China
China’s two domestic stock markets, i.e., the Shanghai and the
Shenzhen stock exchanges, were established in the early 1990s.
There were 1525 firms listed in the Chinese A-share markets by
the end of 2008, and the total market capitalization reached 12.1
trillion RMB, the third largest stock market in the world (after US
and Japan).3 Due to the transition nature of Chinese economy, Chi-
nese stock markets function differently from those of major mature
market economies in that the markets are heavily intervened by the
administration. In this section, we demonstrate how China substi-
tuted administrative means for market mechanisms by focusing on
the listing process and underpricing of IPOs since they obviously
af- fect seasoned equity financing decisions of Chinese firms.
The initiative of setting up domestic stock markets in China was
to provide under-performed State-Owned Enterprises (SOEs) with
a fresh channel of external financing, which determines that the
listing process has been unavoidably political-connected. During
the period of 1993–2000 the quota system was applied to the
selection of firms to be listed, under which the Chinese Securities
Regulatory Committee (CSRC) allocated the quota 4 to ministries
and local governments, who selects candidate firms to be listed.
The selected firms must undergo a process of restructuring in terms
of both the organizational structure and the accounting system,
which is often termed as ‘‘financial packaging”. The quota system
was mainly applied to former SOEs. The selected SOEs normally
put their potentially profitable business units together to form a
new firm to be listed and leave unprofitable units with the former
SOEs. If the SOE invests more than 50% of assets in the new firm,
the newly listed firm remains the status of being state-owned,
other- wise it could be a new entity owned by, for example, a legal
person. Obviously, this administrative listing process employed
very little market principle. The first non-quota IPO appeared only
in 2001 in China. This administrative intervention in the listing
process in Chi- nese stock markets has resulted in many problems,
including severe earnings management, tunneling from listed firms
to parent SOEs, etc. In particular, as a consequence of this
administrative listing pro- cess, the size of Chinese listed firms is in
general very small in terms of market capitalization, which
potentially created hunger for fur- ther seasoned equity issues.
Not only the listing process but also the price of IPOs was
administratively intervened in China, which is responsible for
strong desire of Chinese firms for SEOs. Before 1995, the CSRC
determined all IPOs prices. In most of other times before 2004 (ex-
pect for March 1999–June 2001), IPOs prices were administrated
by the CSRC by setting a ceiling for the Price Earnings (PE) ratio.
For example, during 1996–1999, the price was set to restrict the
PE ratio in the range of 12–14. During the period of 2001–2004,
the maximum PE ratio was set to be 20. Such a heavily administra-
tive regulation on the PE ratio resulted in serious underpricing of
Chinese IPOs, giving rise to strong desire for additional equity
3
The exchange rate was 6.836 RMB/USD by the end of 2008.
4
The number of shares during 1993–1996 and the number of IPO firms during 1996–
2000.
 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157
financing immediately after IPOs.5 Logically, it is rational for firms
to raise a modest amount of funds via IPOs to reduce the loss due
to IPO underpricing and wait to raise additional funds through SEOs
in subsequent years when the share price is higher.
Perhaps the most striking feature of Chinese listed firms was
the existence of non-tradable shares before 2005, i.e., the shares
held by the state and the state-related legal persons were not al-
lowed to be traded on the secondary market. Non-tradable shares
accounted for about two-thirds of total shares outstanding in a
typical listed firm before 2005. This ownership split structure by
design guaranteed state ownership intact after a firm went public.
More importantly, for SEOs activities, the existence of non-tradable
shares made the controlling position of largest shareholders
unchallengeable. This is perhaps the reason why previous studies
on Chinese SEOs argue that the exclusive motivation of Chinese
SEOs is that controlling shareholders use SEOs as a means to
expro- priate outside minority shareholders. In April 2005 China
officially initiated the so called ‘‘ownership split reform”. Once a
firm com- pleted the reform, its non-tradable shares are allowed to
be freely traded on the secondary market. This ownership split
reform may change the SEOs behavior of Chinese firms.
Undoubtedly, the larg- est shareholders in Chinese firms are
expected to restrain them- selves from behaving opportunistically
because they are now under closer scrutiny of the market and
under pressure of being challenged by other shareholders.
3. Related literature
Researches on SEOs based on firms outside China have estab-
lished some standard theories explaining the motivation of a firm
for issuing SEOs. These can be summarized as: financing for invest-
ment and growth; the tradeoff theory; market timing; and agency
theory. In this section, we review this line of standard literature
and discuss how these theories apply to China.
3.1. Financing for investment and growth
A fundamental explanation of why the firm issues SEOs is to fi-
nance investment and growth. Myers (1977) claims that the firm
with growth potential prefers to finance new investment by equity
in order to prevent wealth transfer from shareholders to debthold-
ers. In addition, investment under growth is of high uncertainty,
suggesting high uncertainty surrounding the firm’s future cash
flow, which results in uncertainty about the firm’s financial health-
iness in the future. To buffer against possible financial constraints
due to debt financing, the firm with greater growth potential tends
to use more equity finance. Kim and Weisbach (2008) document
that firms spend incremental capital mainly on R&D and capital
expenditures, which suggests that firms normally use SEOs to raise
additional capital in order to finance investment and growth.
Walker and Yost (2008) provide evidence that no matter what
the stated usage of capital raised from SEOs is, ex post, firms always
use SEOs proceeds to increase capital expenditures and R&D.
Harjoto and Garen (2003) find that listed firms with greater growth
potential are more likely to conduct SEOs after their IPOs.
Although there has been no direct evidence on financing for
investment and growth through SEOs in the Chinese stock market,
the theory of financing for investment and growth can be directly
applied to China given that Chinese listed firms have become
increasingly profit-oriented and most of them are in the growth
stage.
5 6
Chan et al. (2004) document that the average underpricing of A-share IPOs in
China over the 1993–1998 interval was 178%. Wang (2005) reports that the average
initial return of Chinese IPOs over the period from 1994 to 1999 was as high as 272%.
1145
3.2. The tradeoff theory
The tradeoff theory contends that the firm uses equity issues to
adjust its capital structure in order to maintain an ‘optimal’ level of
leverage that balances the benefit (tax shield) and the cost (finan-
cial distress) of debt financing (Modigliani and Miller, 1958, 1963;
Myers, 1977). Although the tradeoff theory has been mainly exam-
ined in the context of the firm’s capital structure decision, some
scholars document that the tradeoff theory also explains motiva-
tion of the firm’s SEOs decision. For example, both Marsh (1982)
and Hovakimian et al. (2001) document that firms whose leverage
ratio is higher than their optimal level are more likely to conduct
SEOs to lower their leverage.
The tradeoff theory is expected to apply to Chinese listed firms,
at least to a certain extent. Chinese listed firms borrow mainly
from banks due to the lack of a corporate debt market. Although
being still dominated by state ownership, the Chinese banking sec-
tor has been undergoing major reforms, which made the Chinese
banking sector similar to their counterparts in mature market
economies. Banks are increasingly playing an effective monitoring
role in borrowing firms, which suggests that costs of borrowing
have become a priority concern for the firm. In addition, some evi-
dence suggests that Chinese firms are concerned about tax benefits
of debt financing (e.g., Huang and Song, 2006). Therefore, it is
likely for Chinese firms to use SEOs as a means to adjust capital
structure in order to achieve a balance between costs and benefits
of debt financing.
3.3. Market timing
The pecking order theory (Myers and Majluf, 1984) states that
with the presence of asymmetric information between outside
investors and the firm, the order of the firm’s financing choice
should be firstly internal funds, risk-free debt, risky debt, and, at
a last resort, equity. Because equity financing suffers the most se-
vere information asymmetry problem between outside investors
and the firm’s insiders, outside potential investors intend to un-
der-value the firm’s equity. Hence the firm is willing to issue
new equity only when it is overvalued by the stock market. Tim-
ing the market is therefore a likely explanation for the firm to use
equity financing as a means to raise external capital. 6 Indeed,
Pagano et al. (1998) find that Italian IPOs are mainly motivated
by overvaluation and timing the market. Kim and Weisbach
(2008) document that the firms with high market to book ratios
are more likely to keep more cash from a marginal dollar raised
from SEOs than low market valuation firms, suggesting that firms
with high market valuation are more likely to conduct SEOs to take
advantage of their overvaluation. Henderson et al. (2006) document
that market timing considerations appear to be very important in
equity issuance decisions not only for domestic (US) firms but also
for firms conducting cross-boarder equity financing. Graham and
Harvey (2001) find that one important factor driving the firm’s SEOs
decision is the pre-issue stock appreciation. In addition, evidence
shows that the firm’s stock market returns will be lower after SEOs
(Baker and Wurgler, 2002; Henderson et al., 2006), which indirectly
supports that one possible motivation for the firm to conduct SEOs
is to time the market.
Chinese listed firms have been enjoying high market valuation
during most of the times in the history of the Chinese stock market.
For example, the sample firms used in this paper had enjoyed an
Autore and Kovacs (2010) document that the firms suffering with higher
information asymmetry are more likely to issue equity as opposed to debt when
the amount of asymmetry information is temporarily low.
1146 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157
average market to book value of as high as 3.66 during 1994–2008.
Some scholars claim that overvaluation may explain why Chinese
listed firms prefer equity financing to other sources (e.g., Huang
and Song, 2006; Zou and Xiao, 2006).
3.4. Agency theory
Two types of agency problem are relevant to the firm’s SEOs
decision: the agency conflict between managers and shareholders
(Jensen and Meckling, 1976; Jensen, 1986), and the conflict of
interests between controlling and minority shareholders (La Porta
et al., 1999; Claessens et al., 2000; Berkman et al., 2009; Bennedsen
and Nielsen, 2010). Agency conflict between managers and
shareholders is relevant because it predicts that entrenched
managers may be motivated to issue additional equity in order
to have more financial resources (such as free cash flow and
the like) at hands for their private benefits of control. The conflict
of interests between controlling and minority shareholders is also
relevant to the firm’s SEOs decision because SEOs are likely to be
used by controlling shareholders as a means to expropriate
minority shareholders.
Researchers investigating corporate equity issue behavior based
on firms in mature market economies exclusively emphasize on
how agency conflict between managers and shareholders, i.e.,
managerial discretion, motivates the firm’s equity issue decision,
while there is little evidence on the impact of the conflict of inter-
ests between majority and minority shareholders. For example,
Jung et al. (1996) claim that among the three explanations of the
security issue decision, i.e., the pecking-order model, the agency
model (managerial discretion), and the market timing theory, the
agency model (managerial discretion) explains the firm’s equity
issuance behavior.
Although managerial discretion has been the focus of discus-
sion in mature markets concerning the firm’s SEOs decision, aca-
demic attention has been paid to explaining the motivation of
Chinese firms’ SEOs from the perspective of conflict of interests
between controlling and minority shareholders. This research
stream is a natural response to the unchallengeable controlling
position of the largest shareholders in Chinese listed firms due
to the existence of non-tradable shares before 2005. For exam-
ple, Aharony et al. (2000) report that parent SOEs often retrieve
assets from listed firms to help their other non-profitable units.
Chen et al. (2003) document that it is a common practice in Chi-
na that parent SOEs first use related-party transactions to help
the listed firm improve its financial condition for the sake of
meeting the profitability requirement for issuing SEOs, and then
they tunnel assets from the listed firms after SEOs. Jian and
Wong (2004) find that listed firms have more frequent related-
party transactions after rights issues. Yu et al. (2006) show that
Chinese listed firms heavily engaged earnings management to
meet the rights issue threshold during the 1994–2002 period.
Lee and Xiao (2006) report that firms increase dividend payouts
after rights issues, arguing that non-tradable shareholders use
cash dividends to tunnel.
4. Data and methodology
4.1. Data
Our empirical analyses cover all the listed non-financial firms
that have conducted SEOs in Chinese stock markets during 1994–
2008. SEOs activities in our paper are defined as either rights issues
or public offerings. In rights issues (peigu) the existing sharehold-
ers are granted with the priority to subscribe new shares, while
in public offerings (zengfa) new shares are directly issued to public
investors.7 Our sample period covers almost the entire history of
the Chinese stock market, which enables us to test whether the
SEOs behavior of Chinese firms had been changed along with the
progress of China’s market transition. Hence we are able to draw a
relatively complete picture concerning SEOs behavior of Chinese
listed firms. The data are taken from Sinofin database administrated
by the China Centre for Economic Research (CCER) in Peking
University. When preparing for the data we first collect all the
SEOs cases during the sample period, we then follow these SEOs
cases to identify the firms that issued these SEOs. During 1994–2008
there were in total 1081 SEOs cases and 848 firms were involved in
these SEOs activities.8 We treat these 848 firms that have issued
SEOs during the sample period as our sample firms whose
information on SEOs activities is then matched with the
information of the firms’ balance sheets and in- come statements
during the same period. This way the firm’s SEOs activities were
matched with the firm’s real and other financial activities, which
provides us with a panel data set for these firms during 1994–2008.
Although mainly relying on cross-section estima- tions based on
SEOs cases in our empirical analyses, we use the information
revealed by the panel data to detect some differences between
SEOs firm-years and non-SEOs firm-years of our sample firms.
An overall picture of SEOs activities in China during 1994–2008
is displayed in Table 1, which shows that rights issues were more
active than public offerings. There were totally 1081 issues of SEOs
during the sample period, of which 908 were rights issues,
accounting for 84% of total SEO issues, while public offerings ac-
counted for 16%. The total SEOs proceeds amounted to 510 billion
RMB in the sample period, of which 266 billion RMB were from
rights issues and 245 billion RMB were from public offerings.
Table 2 presents the industry distribution of SEOs during our
sample period. As we can see that more than half of SEOs were is-
sued by manufacturing firms. Total number of SEOs conducted by
manufacturing firms accounted for 54.9% of total SEOs in the sam-
ple period. There were 507 listed firms in manufacturing industry
that have conducted SEOs, while the average number of listed
firms in this industry in the same period was 676, hence 75% of
the listed firms in the manufacturing industry have conducted
SEOs during the sample period. Although the number of SEOs in
wholesale and retail industry only accounted for 11.4% of the total
SEOs, 94.1% of the listed firms in this industry had issued SEOs
dur- ing the sample period. In sum, Table 2 shows that the majority
of Chinese listed firms (77.6%) had used SEOs as an external
financing channel during 1994–2008.
4.2. Variables and empirical specifications
To examine empirical relevance of standard theories explaining
the motivation of SEOs in the Chinese context, we need to select
some proxies for the relevant theories. Following Kim and
Weisbach (2008), we use annual growth rate of sales (Growth)
and fixed investment (Investment) to proxy for the theory of
financing for investment and growth, where Investment is mea-
sured as the changes in fixed assets scaled by total assets of the
firm. We use the difference between the firm i’s leverage and the
average leverage of other firms in the same industry excluding firm
7
Private placement is another way of raising capital in the Chinese stock market.
Private placement (dingxiang zengfa or feigongkai faxing) refers to that shares are
issued only to certain groups such as institutional investors and other enterprises. We
exclude private placement from our research because private placement in China has
been heavily used for ‘‘reverse acquisition”, i.e., it is often used by private firms to go
‘‘public” by means of purchasing shares issued by a listed firm via private placement.
Obviously, the motivation of private placement is in most cases different from that of
rights issues and public offerings.
8
We have taken some firms out of the sample due to missing observations and
extreme values.
 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157 1147

Table 1
A summary of SEOs activities in China, 1994–2008. The sample period is from 1994 to 2008. The issue year is the year of the SEO announcement. SEOs include rights issues and
public offerings.

Rights issues Public offerings Total SEOs

No. of issues Capital raised (bn RMB) No. of issues Capital raised (bn RMB) No. of issues Capital raised (bn RMB)
1994 64 5.8 0 0 64 5.8
1995 64 11.2 0 0 64 11.2
1996 51 10.0 0 0 51 10.0
1997 109 24.8 0 0 109 24.8
1998 155 40.2 7 3.0 162 43.3
1999 120 28.3 5 5.5 125 33.8
2000 181 55.2 24 22.6 205 77.9
2001 84 31.2 13 10.4 97 41.6
2002 20 5.8 30 16.8 50 22.5
2003 24 6.2 14 9.2 38 15.4
2004 21 9.9 12 16.1 33 26.1
2005 0 0.0 3 26.4 3 26.4
2006 0 0.0 7 13.0 7 13.0
2007 7 23.3 31 70.3 38 93.6
2008 8 13.9 27 51.2 35 65.1

Total 908 266 173 245 1081 510

Table 2
Industry distributions of SEOs, 1994–2008. The sample period is from 1994 to 2008. The industry classification is based on the CSRC industry classification code.

Industry code Industry description No. of rights

issues No. of public Total no. As % of No. of Average no. (7) = (5)/(6) × 100
offerings of SEOs total SEOs SEO firms of listed firms
(1) (2) (3) (4) (5) (6)

A Agriculture 18 1 19 1.8 20 25 81.1

B Mining 6 2 8 0.7 12 16 73.6
C Manufacturing 478 115 593 54.9 507 676 75.0
D Utilities 41 9 50 4.6 32 42 76.6
E Building 15 3 18 1.7 19 19 100.0
F Transportation 25 2 27 2.5 26 39 66.7
G Information Technology 37 10 47 4.3 38 59 64.9
H Wholesale and Retail 119 4 123 11.4 77 82 94.1
J Real Estate 40 13 53 4.9 38 43 88.8
K Services 26 4 30 2.8 24 33 73.8
L Media 9 2 11 1.0 10 10 100.0
M Others 94 8 102 9.4 62 72 86.5

Total 908 173 1081 100.0 865 1114 77.6

i in the same year to proxy for the tradeoff theory (Tradeoff) (e.g.,
governance is the phenomenon of non-tradable shares held mainly
Hovakimian et al., 2001). Leverage is measured by the ratio of total
by state and state-related legal agencies before 2005 (e.g., Wang,
debt to total assets of the firm. Following Kim and Weisbach
2005). Hence, non-tradable shareholdings directly represent the
(2008), we use the market to book ratio (MB) to construct a mea-
interests of controlling shareholders in Chinese listed firms before
sure of overvaluation as a proxy for market timing. More specifi-
2005. Even after the ownership split reform, there are still a signif-
cally, overvaluation is measured by the difference between the
icant amount of non-tradable shares in the listed firms due to the
firm i’s MB and the average MB of all other firms excluding firm i
lock-up period and the restrictions on the amount of non-tradable
in the same industry in the same year (Overvalue). We proxy for
shares to be sold to the market within a specific period of time,
agency conflict between managers and shareholders (managerial
which allows us to use non-tradable shares as a proxy for the
discretion) by extra administrative expenses (EAE). Administrative
conflict between controlling and monitory shareholders after
expenses are financial sources that can be easily manipulated
2005 until 2008. The logic is that if controlling shareholders use
by mangers; hence administrative expenses might be used by
SEOs to expropriate minority shareholders, then non-tradable
managers for their private benefits of control (e.g. Bai et al.,
shareholdings should be positively associated with SEOs activities.
2004). More specifically, we construct extra administrative
Besides the proxies for the main standard theories that may
expenses (EAE) of the firm to proxy for managerial discretion,
motivate the firm’s SEOs, we include the following control vari-
which is measured as the difference between the firm i’s adminis-
ables in empirical analyses:
trative expenses and the average administrative expenses of all
Firm size (Size). Firm size is a relevant variable when examining
other firms in the same industry excluding firm i in the same year.
the motivation of equity issue behavior (Kim and Weisbach, 2008).
These extra administrative expenses (EAE) can better reveal the
We use firm size as a control variable due to the following consid-
degree of managerial discretion after considering for the average
erations: (a) to control for the effect of administrative intervention
level of administrative expenses of other firms in the same
in the listing process. As explained earlier in Section 2, the quota
industry. Finally, the conflict of interest between controlling and
system adopted in China restricted the size of Chinese IPOs, which
minority shareholders is proxied by the ratio of non-tradable
may result in the desire for additional equity issues for Chinese
shareholdings to total shares outstanding (Nontradable). As
listed firms; (b) Size also carries the effect of financial constraints
mentioned earlier, one distinguished feature of Chinese corporate
faced by the firm. Larger firms in general have more sources of
1148 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157

financing than smaller firms, hence the demand for external equity
value of one if the firm conducts SEOs in year t , and zero
financing may be lower. Firm size is measured by the natural log-
otherwise. In the cross-section estimation, the dependent variable is
arithm of a firm’s total assets.
the amount of capital raised via SEOs scaled by total assets of the
Profitability (Profit). We use the firm’s profitability to capture
firm (SEOCapitalt). We use the lagged-one period observations of
the availability of internal funds. The firm who has more internal
inde- pendent variables (except for Next) because the observations
funds may need less external financing, implying few SEOs activi-
in year t contain the information on the consequences of SEOs in
ties according to the pecking order theory (Myers and Majluf,
the same year. We first test the theories by using the proxy for a
1984). Profitability is measured by earnings before interests and
specific the- ory one by one, and then in the expanded full model
tax scaled by total assets.
we put the proxies of all relevant theories in the same estimation.
Debt (Debt). Debt is another source of external financing. The
Table 3 displays some characteristics between SEOs firm-
availability of debt for the firm affects the firm’s SEOs decisions.
years (SEOs cases hereafter) and non-SEOs firm-years (non-
More debt financing may lead to less equity financing according
SEOs cases hereafter). We observe that SEOs cases are associated
to the pecking order theory. However, too much debt may also re-
with smaller firm size with a t-test —statistics of t = 8.51. SEOs
quire the firm to issue more equities to balance the capital struc-
cases also expe- rience higher profitability than non-SEOs cases
ture according to the tradeoff theory (e.g., Hovakimian et al., 2001).
(t = 21.09). Invest- ment ratio is also higher for SEOs cases than
Debt is measured by the ratio of total debt to total assets of the
that for non-SEOs cases (t = 12.74). Although sales growth
firm.
appears to be higher for non-SEOs cases, the difference between
Stock market volatility (Volatility). Because equity financing
the two groups in sales growth is not statistically
— significant (t =
decisions are responsive to stock market volatility, we need to iso-
0.89). On average SEOs cases seem to have a lower debt to assets
late stock market volatility from other factors affecting SEOs. For
ratio as compared to
example, SEOs respond to both market volatility and market over- — non-SEO cases (t = 5.23), indicating that the
firm may need to use SEOs as a means to raise capital when its
valuation. To examine the impact of market overvaluation, we
borrowing is low. However, the average difference between the
should control for stock market volatility. We construct a measure
firm’s leverage and the industry average, i.e., Tradeoff , for SEOs
of market volatility as the difference between the standard devia-
cases is not signifi- cantly different from that of non-SEOs cases
tion of the firm i’s daily stock returns and the average standard
(t = 0.78), providing initial evidence that the firm’s SEOs
deviation of daily stock returns of other firms in the same industry
decision may not be motivated by the tradeoff theory. It appears
excluding firm i.This volatility measure captures idiosyncratic vol-
that the industry adjusted stock return volatility (Volatility) for
atility of firm i’s stock returns.
SEOs cases is lower than that for non-SEOs cases (t = 7.65),
In addition, we use two variables to control for multiple SEOs: —
which may be a consequence of timing the market by issuing
(a) the number of years between the last and the current SEOs
SEOs because market timing may result in that the share prices
(Gap) is used to control for the effect of previous SEOs; (b) a dum-
of SEOs cases are closer to the industry level. We also observe
my variable (Next) that takes the value of one if the firm has an-
from Table 3 that SEOs cases on average have a higher market
other SEOs in 3 years subsequent to the current SEOs.
to book ratio (MB) than non-SEOs cases (t = 9.26). In addition,
Considering that SEOs decisions differ across industries, we also
SEOs cases also enjoy a higher overvaluation (Over- value) as
control for the industry effect by adding an industry dummy
compared to non-SEOs cases. The mean of overvaluation for
(Industry) in estimations.
SEOs cases is 0.3444, while that of non-SEOs cases is 0.0845. The
Our benchmark empirical model is then specified as follows:
difference in overvaluation between SEOs and non-SEOs cases is
statistically significant (t = 3.544). The observations on both the

SEOi market to book ratio and overvaluation provide us with initial evi-
¼ þ i;t— þ i:t—1 þ þ i;t—1 dence that SEOs may be motivated by taking advantage of market
t
b0 b1Industry 1 b2Gap b3Nextit b4Size
þ b5Profiti;t—1 þ b6Debti;t—1 þ b7Volatilityi;t—1 overvaluation. As far as extra administrative expenses (EAE) is con-
cerned, we see that SEOs cases have a lower extra administrative
þ b8 TheoryProxyi;t—1 þ eit ð1Þ
expenses (EAE) as compared to non-SEOs cases (t =— 2.30). This
We first estimate Eq. (1) using a panel data fixed effect logit model seems to be contradictory to the agency costs explanation of SEOs,
and then using a cross-section model. In the panel data logit which predicts that SEOs proceeds are used by managers for their
estima- tion, the dependent variable SEOit is a dummy variable, private benefits of control. However, Table 3 shows that the ratio of
taking the

Table 3
Characteristics between SEOs firm-years and non-SEOs firm-years. The sample period is from 1994 to 2008. Size is measured as the logarithmic total assets of the firm. Profit
denotes profitability of the firm, which is measured by earnings before interest and tax scaled by total assets. Debt is the ratio of total debt to total assets of the firm. Volatility is
measured by the difference between the standard deviation of the firm i’s daily stock returns and the average standard deviation of daily returns of other firms in the same
industry excluding firm i. Growth denotes the firm’s annual growth rate of sales. Investment is measured as the change in fixed assets scaled by total assets of the firm. Tradeoff
denotes the difference between the firm i’s leverage and the average leverage of other firms in the same industry excluding firm i in the same year. MB denotes the market to book
ratio. Overvalue denotes overvaluation, which is measured as the difference between the firm i’s MB and the average MB of other firms in the same industry excluding firm i in the
same year. EAE denotes extra administrative expenses, which is measured as the difference between the firm i’s administrative expenses and the average administrative expenses
of other firms in the same industry excluding firm i in the same year. Nontradable is the ratio of non-tradable shareholdings to total shares outstanding of a firm.

SEOs firm year Non-SEOs firm year t-Test statistics

Mean Median St.Dev. Obs. Mean Median St.Dev. Obs.

Size 20.7958 20.6911 0.9786 1036 21.0729 21.0093 1.0236 7743 —8.512
Profit 0.0732 0.0652 0.0382 1033 0.0188 0.0333 0.2015 7721 21.090
Debt 0.2152 0.2136 0.1292 1036 0.2397 0.2217 0.2131 7741 —5.235
Volatility —0.0008 —0.0008 0.0036 1036 0.0001 —0.0002 0.0048 7708 —7.655
Growth 0.2943 0.1935 0.4548 1018 0.3219 0.1215 2.3239 7125 —0.891
Investment 0.0711 0.0469 0.0991 986 0.0259 0.0129 0.1360 7063 12.741
Tradeoff 0.0000 —0.0045 0.1276 1036 —0.0037 —0.0191 0.2124 7741 0.776
MB 4.4341 3.8685 2.4322 1034 3.6749 2.9398 2.7042 7369 9.266
Overvalue 0.3444 —0.1237 2.1869 1034 0.0845 —0.4179 2.3523 7368 3.544
EAE —0.0018 —0.0059 0.0226 1001 0.0000 —0.0066 0.0304 7446 —2.303
Nontradable 0.6408 0.6721 0.1364 1036 0.5628 0.5848 0.1539 7708 17.014
 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157 1149

non-tradable shares to total shares outstanding is higher for SEOs when it is overvalued by the stock market, which is consistent with
cases than non-SEOs cases (t = 17.01), suggesting that SEOs activi- the theory of market timing. In columns (4) and (6) the estimated
ties may be motivated by expropriation of minority shareholders coefficient for extra administrative expresses (EAE) is significant
by controlling shareholders. with a positive sign, suggesting that the need for a larger amount
of extra administrative expenses may be the reason why the firm
issues SEOs. Column (6) of Table 4 shows that non-tradable share-
5. Empirical results holdings (NonTradable) is significantly related to the SEOs dummy
but with a negative sign. Given that non-tradable shares are mainly
5.1. Evidence on market timing held by the state and the state-related agencies who are in most
cases controlling shareholders in Chinese listed firm, this result
We first estimate Eq. (1) using a panel data fixed effect logit does not support the expropriation explanation claimed by previ-
model in Stata. In this estimation we check whether the proxies ous studies that SEOs are mainly used by controlling shareholders
for SEOs theories are able to predict the likelihood that the firm as a means to exploit outside minority shareholders in China (e.g.,
conducts SEOs. The results are reported in Table 4. Each column Aharony et al., 2000; Jian and Wong, 2004). In sum, based on the
in Table 4 except for the last column corresponds to each theory evidence reported in Table 4, we can tentatively conclude that both
that explains the motivation of SEOs. In column (6) of Table 4 we the market timing and the agency costs (managerial discretion)
combine all the mentioned theories in one estimated equation explanations seem to be important motives of Chinese SEOs.
due to the concern that the proxies for different theories may be Given that firms do not conduct SEOs every year, in panel data
correlated with each other and hence carry the effect of other the- logit estimation we can only use a dummy variable to capture
ories. As we can see from Table 4, the estimated coefficient for whether the firm is active in issuing SEOs in a specific year. How-
fixed investment (Investment) has a negative sign and that for ever, perhaps a more accurate measurement of SEOs activities is
growth (Growth) is insignificant in both columns (1) and (6), sug- the amount of capital raised via SEOs. To be able to utilize this
gesting that financing for investment and growth may not be a information, we reduce our sample to SEOs cases. In other words,
motivation for the firm to conduct SEOs. The estimated coefficient we run the cross-section regression based on SEOs cases. We esti-
for the proxy of the tradeoff theory (Tradeoff) is insignificant in mate Eq. (1) using Ordinary Least Squares (OLS). In this set of esti-
both columns (2) and (6), indicting that the firm does not seem mation, we use the lagged-one period observations of independent
to use SEOs to adjust its capital structure, inconsistent with the variables (except for Next) to explain how much funds raised
tradeoff theory. Both columns (3) and (6) show that the estimated through SEOs in the current year, where the dependent variable
coefficient for overvaluation (Overvalue) is highly significant with a is the SEOs proceeds scaled by total assets of the firm (SEOcapital).
positive sign, implying that the firm is more likely to issue SEOs The results are shown in Table 5. The estimated coefficient for
Table 4
Motivation of SEOs: panel data fixed effect logit estimation. This table presents results of panel data fixed effect logit estimation of Eq. (1). The sample period is from 1994 to 2008.
The dependent variable is whether the firm conducts SEOs in year t. Gap indicates the number of years between the current SEOs and the last SEOs. Next is a dummy variable that
takes the value of one if the firm issue SEOs in the next 3 years after the current SEOs. Size is measured as the logarithmic total assets of the firm. Profit denotes profitability of the
firm, which is measured by earnings before interest and tax scaled by total assets. Debt is the ratio of total debt to total assets of the firm. Volatility is measured by the difference
between the standard deviation of the firm i’s daily stock returns and the average standard deviation of daily returns of other firms in the same industry excluding firm i. Growth
denotes the firm’s annual growth rate of sales. Investment is measured as the change in fixed assets scaled by total assets of the firm. Tradeoff denotes the difference between the
firm i’s leverage and the average leverage of other firms in the same industry excluding firm i in the same year. Overvalue denotes overvaluation, which is measured as the
difference between the firm i’s market to book ratio (MB) and the average MB of other firms in the same industry excluding firm i in the same year. EAE denotes extra
administrative expenses, which is measured as the difference between the firm i’s administrative expenses and the average administrative expenses of other firms in the same
industry excluding firm i in the same year. Nontradable is the ratio of non-tradable shareholdings to total shares outstanding of a firm. Industry effect is controlled by adding an
industry dummy. The figures in parentheses are the t-statistics.

(1) (2) (3) (4) (5) (6)

Gapt—1 0.5414 0.7641 0.7489 0.7821 0.7647 0.5315

(7.85) (11.94) (11.71) (11.84) (11.87) (7.43)
Nextt 69.5926 64.3820 25.1571 49.8920 65.2867 24.5858
(0.15) (0.18) (0.06) (0.04) (0.12) (0.03)
Sizet—1 —0.1080 —0.4031 —0.3015 —0.3139 —0.4090 —0.1825
(—0.64) (—2.60) (—1.95) (—1.97) (—2.47) (—0.93)
Profitt—1 12.0966 10.3016 5.8949 11.1813 10.0706 7.7425
(4.74) (4.62) (2.46) (4.90) (4.54) (2.81)
Debtt—1 5.6437 7.0430 4.7984 5.6929 5.3203 6.5868
(5.96) (2.87) (5.81) (6.66) (6.46) (2.24)
Volatilityt—1 —17.9799 —35.2867 —45.7381 —40.6452 —35.8150 —33.7141
(—1.06) (—2.96) (—3.72) (—3.25) (—3.00) (—1.88)
Growtht—1 —0.0906 —0.1253
(—1.37) (—1.62)
Investmentt—1 —1.9024 —1.6328
(—3.00) (—2.47)
Tradeofft—1 —1.8073 —0.9180
(—0.77) (—0.33)
Overvaluet—1 0.1825 0.1955
(4.36) (4.10)
EAEt—1 12.2989 11.9015
(2.80) (2.27)
—0.3921 —2.1012
(—0.41) (—1.92)

Industry Included Included Included Included Included Included

Chi-squared (p-value) 2415.18 2740.26 2695.09 2627.05 2739.83 2333.50
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Obs. 6300 7653 7416 7218 7653 5936
1150 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157

Table 5
Motivation of SEOs: cross-section estimation. This table presents results of cross-sectional estimation of Eq. (1). The sample period is from 1994 to 2008. Gap indicates the number
of years between the current SEOs and the last SEOs. Next is a dummy variable that takes the value of one if the firm issue SEOs in the next 3 years after the current SEOs. Size is
measured as the logarithmic total assets of the firm. Profit denotes profitability of the firm, which is measured by earnings before interest and tax scaled by total assets. Debt is the
ratio of total debt to total assets of the firm. Volatility is measured by the difference between the standard deviation of the firm i’s daily stock returns and the average standard
deviation of daily returns of other firms in the same industry excluding firm i. Growth denotes the firm’s annual growth rate of sales. Investment is measured as the change in fixed
assets scaled by total assets of the firm. Tradeoff denotes the difference between the firm i’s leverage and the average leverage of other firms in the same industry excluding firm i
in the same year. Overvalue denotes overvaluation, which is measured as the difference between the firm i’s market to book ratio (MB) and the average MB of other firms in the
same industry excluding firm i in the same year. EAE denotes extra administrative expenses, which is measured as the difference between the firm i’s administrative expenses and
the average administrative expenses of other firms in the same industry excluding firm i in the same year. Nontradable is the ratio of non-tradable shareholdings to total shares
outstanding of a firm. Industry effect is controlled by adding an industry dummy. The figures in parentheses are the t-statistics, computed using the white (1980)
heteroskedasticity consistent standard error.

(1) (2) (3) (4) (5) (6)

Constant 0.9809 1.1278 1.0489 0.9519 1.2075 0.9491

(7.57) (7.29) (6.67) (8.93) (7.57) (9.07)
Gapt—1 0.0108 0.0069 0.0043 0.0102 0.0057 0.0060
(4.22) (1.78) (1.11) (4.05) (1.49) (2.24)
Nextt —0.0322 —0.0390 —0.0399 —0.0398 —0.0386 —0.0350
(—2.99) (—2.58) (—2.67) (—3.84) (—2.58) (—3.40)
Sizet—1 —0.0392 —0.0466 —0.0403 —0.0385 —0.0466 —0.0350
(—8.21) (—6.42) (—5.45) (—7.86) (—6.57) (—7.22)
Profitt—1 0.6707 0.7867 0.5322 0.7191 0.8047 0.4541
(5.28) (4.21) (2.54) (5.59) (4.31) (3.34)
Debtt—1 —0.0330 0.0259 —0.1097 —0.0324 —0.0733 0.0998
(—0.90) (0.10) (—1.96) (—0.86) (—1.35) (0.63)
Volatilityt—1 4.7875 7.6244 6.8323 4.4885 7.5197 4.0467
(3.96) (4.31) (3.85) (3.75) (4.28) (3.46)
Growtht—1 0.0073 —0.0009
(0.74) (—0.09)
Investmentt—1 0.0392 0.0455
(0.89) (1.09)
Tradeofft—1 —0.1000 —0.1633
(—0.42) (—1.05)
Overvaluet—1 0.0088 0.0095
(2.58) (4.35)
EAEt—1 —0.1864 —0.1522
(—0.99) (—0.85)
—0.0839 —0.0828
(—1.75) (—2.70)

Industry Included Included Included Included Included Included

Ad.R-squared 0.1691 0.0995 0.1055 0.1480 0.1022 0.2103
F-statistic (p-value) 11.67 8.21 8.70 11.85 8.43 11.98
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Obs. 840 981 981 938 981 826

financing for investment (Investment) becomes positive but insig-

result concerning firm size does not confirm the financial con-
nificant in columns (1) and (6). The estimated coefficient for the
straints explanation, which predicts that smaller firms should face
tradeoff theory (Tradeoff) remains insignificant. The positive asso-
more difficulties in obtaining external financing and hence few
ciation between SEOs and managerial discretion (EAE) disappears
SEOs activities. Secondly, all the estimated equations in both
in columns (4) and (6) in Table 5. The estimated coefficient for non-
Tables 4 and 5 show that the estimated coefficient for profitability
tradable shareholdings (NonTradable) remains significant with the
(Profit) is highly significant with a positive sign, which is not in line
same sign (negative) as in Table 4. More importantly for the
with the prediction of the pecking order financing theory. The po-
purpose of the paper, in Table 5 we again obtain evidence that
sitive relation between profitability and SEOs suggests that the
the estimated coefficient for overvaluation (Overvalue) is signifi-
firms may need SEOs for other reasons rather than financing for
cant with positive sign in both columns (3) and (6). Since the result
investment and growth. Thirdly, the estimated coefficient for debt
concerning non-tradable shareholdings (NonTradable) in both Ta-
(Debt) is positive and significant in panel data estimations (Table
bles 4 and 5 does not support the expropriation explanation
4). This result is not consistent with the pecking order theory
claimed by previous studies on Chinese SEOs, we argue that Chi-
either. However, the estimated coefficient for debt is in most cases
nese SEOs can be explained by other theories rather than the con-
not significant in cross-section estimations (Table 5). Finally, the
flict between controlling and minority shareholders. On the ground
relation between SEOs and stock market volatility (Volatility) is
that the market timing theory is consistently confirmed in both Ta-
not clear though. In Table 4, the estimated coefficient for volatility
bles 4 and 5, in the following empirical analyses we concentrate on
(Volatility) is mostly negatively significant, while it is highly posi-
the market timing explanation.
tively significant in Table 5. Assuming that the results base on SEOs
Apart from the results concerning the proxies for the theories
cases (Table 5) are more informative than that base on the SEOs
explaining SEOs motivation, some control variables turn out to
dummy variable (Table 4),9 then according to Table 5 the positive
be significant. Firstly, from Tables 4 and 5 we observe that the esti-
relation between the firm’s stock returns volatility and SEOs pro-
mated coefficient for firm size (Size) is highly significant with a
ceeds is consistent with our main result on timing the market. In
negative sign in almost all the estimations, suggesting that smaller
firms are more likely to conduct SEOs (Table 4) and raise more
funds through SEOs (Table 5). This result confirms our conjecture 9
In cross-sectional (SEOs cases) estimations, we have the direct observation on
that the administrative intervention in the listing process created the quantitative measure of SEOs activities, i.e., SEOs proceeds, which allows us
hunger for SEOs after the firm’s IPO (see Section 2). However, the to directly link how much capital raised via SEOs with the firm’s real and other
financial activities.
 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157 1151

general, higher stock returns volatility implies higher average stock
returns,10 suggesting possible upward market valuation of the firm,
which provides the firm with stronger incentives to raise more cap-
ital via SEOs.
Now that the market timing theory has been clearly confirmed
by evidence in both Tables 4 and 5, we conduct a few additional
tests to provide robustness evidence. To save space we focus on
cross-section estimation based on SEOs
cases.
Table 6
Further evidence on market timing. This table presents further evidence on market
timing. The sample period is from 1994 to 2008. The dependent variable varies across
estimations. Returnat is the firm’s abnormal stock return defined as the difference
between the annual average daily stock returns of firm i and the annual average daily
returns of other firms in the same industry excluding firm i in the same year.
Investment is measured as the change in fixed assets scaled by total assets of the firm.
Returnt+3 is the firm’s average daily stock reruns over 3 years after the current SEOs.
Returna is the firm’s average abnormal stock returns over 3 years after the current
tþ3

To proceed, we first check the ex post impact of SEOs on the
firm’s end-of-year abnormal stock returns by estimating the fol-
lowing equation:
Returnt a ¼ b0 þ b1Industryt þ b2Gapt þ b3Sizet þ b4Profitt
þ b5Debtt þ b6Volatilityt þ b7Growtht
þ b8 Inv estmentt þ b9 SEOcapitalt þ et
In the above equation the key explanatory variable is the amount of
capital raised through SEOs scaled by total assets of the firm, i.e.,
SEOcapital. All other variables involved are defined as the same as
in Section 4.2. In this test, we use all the explanatory variables in
year t to check the impact of them on the firm’s end-of-year abnor-
mal stock returns. We are particularly interested in the estimated
SEOs, where the firm’s abnormal stock returns is adjusted by the stock market index.
Gap indicates the number of years between the current SEOs and the last SEOs. Next
is a dummy variable that takes the value of one if the firm issue SEOs in the next 3
years after the current SEOs. Size is measured as the logarithmic total assets of the
firm. Profit denotes profitability of the firm, which is measured by earnings before
interest and tax scaled by total assets. Debt is the ratio of total debt to total assets of
the firm. Volatility is measured by the difference between the standard deviation of
the firm i’s daily stock returns and the average standard deviation of daily returns of
ð2Þ other firms in the same industry excluding firm i. Growth denotes the firm’s annual
growth rate of sales. Overvalue denotes overvaluation, which is measured as the
difference between the firm i’s market to book ratio (MB) and the average MB of other
firms in the same industry excluding firm i in the same year. SEOCapital denotes the
proceeds raised through SEOs scaled by total assets of the firm. The figures in
parentheses are the t- statistics, computed using the white (1980) heteroskedasticity
consistent standard error.
(1) (2) (3) (4) (5)
Investmentt Returna Returnt+3 Returna 3

Returna
t t tþ
coefficient b9 , which captures the ex post effect of SEOs on the firm’s
Constant 0.0022 —0.0822 —0.0002 0.0041 0.0027
end-of-year abnormal stock returns (Returna). The firm’s abnormal (2.29) (—0.95) (—0.25) (4.25) (4.23)
stock return is defined as the difference between the average annu- Gapt 0.00002 —0.0070 —0.00003 0.00004 0.00003
alized daily stock returns of firm i and the average annualized daily (1.11) (—3.57) (—1.55) (1.72) (2.10)
stock returns of other firms in the same industry excluding firm i in Nextt 0.0005 0.0002
(6.02) (4.43)
the same year. We do so to exclude the common movement of the
Sizet —0.0001 0.0067 —0.000002 —0.0002 —0.0001
firm’s stock returns. In the standard literature, it is quite common (—3.33) (1.66) (—0.05) (—4.47) (—4.44)
to check whether SEOs activities negatively affect the firm’s stock Profitt 0.0118 0.3593 0.0078 0.0011 —0.0009
re- turns, if so, it indirectly confirms that the firm is actually taking (9.44) (3.24) (6.25) (1.01) (—1.21)
advantage of market overvaluation by issuing more seasoned equi- Debtt 0.0018 0.0918 0.0013 0.0008 0.0003
(5.31) (2.97) (3.81) (2.63) (1.58)
ties (e.g., Henderson et al., 2006).
Volatilityt 0.0628 —0.2324 0.0583 —0.0501 —0.0319
The result of estimating Eq. (2) is reported in column (1) of (5.69) (—0.25) (5.56) (—4.97) (—4.80)
Table 6, which shows that the estimated coefficient for Growtht 0.0002 0.0187 0.0002 0.00006 0.00005
(5.24) (4.06) (4.98) (1.39) (1.84)
SEOCapital
is negatively significant in explaining the firm’s end-of-year abnor-
Investmentt 0.0009 0.0009 0.0004 —0.00006
mal stock returns. (2.45) (2.52) (1.27) (—0.27)
We further test the market timing theory by following Kim and SEOCapitalt —0.0004 0.0212 —0.0004 —0.0003 —0.0002
Weisbach (2008). These authors point out that the firm issuing SEOCapitalt (—2.33) (1.25) (—2.41) (—1.78) (—1.73)
SEOs when its market value is relatively high may not be necessar- m Overvalue
—0.0188 —0.0003
ily driven by timing the market. Instead it is likely that the firm (—2.83) (—4.24)
with high market value has more investment opportunities and Overvaluet 0.0029 0.0003
greater growth potential, hence the firm needs more external cap- (1.07) (9.92)
ital. If this is the case, even if the firm issues SEOs when its market Industry Included Included Included Included Included
value is high, the firm may not be motivated by taking advantage Ad.R-squared 0.1686 0.0953 0.2537 0.1063 0.0739
of market overvaluation. Therefore it is necessary to distinguish F-statistic (p- 13.38 7.05 19.43 7.35 5.26
between market timing overvaluation SEOs and non-market tim- value)
(0.00) (0.00) (0.00) (0.00) (0.00)
ing overvaluation SEOs. According to Kim and Weisbach (2008) if Obs. 978 977 977 909 909
a firm with high market value is motivated by timing the market,
then it should stockpile cash raised via SEOs, while a firm with
high market value who issues SEOs but is not motivated by taking
advantage of market overvaluation should not stockpile capital We are interested in
raised via SEOs, instead the firm should invest more SEOs @ Inv estmentt
proceeds
in fixed investment. Following Kim and Weisbach (2008), we ¼ b8 þ b9Overvaluet:
@SEOCapital
esti- mate the following equation to further test the market
t
timing
theory, 10
For the positive relation between the level and its variability of a stochastic variable,
see Bo and Sterken (2002) and the cited literature there.
Investmentt ¼ b0 þ b1Industryt þ b2Gapt þ b3Sizet þ b4Profitt
þ b5Debtt þ b6Volatilityt þ b7Growtht
þ b8SEOCapitalt þ b9SEOCapitalt m Overvaluet
þ b10 Ov er v aluet þ et ð3Þ
If the estimated coefficients for both b8 and b9 are positive in (3),
then the sensitivity of investment to the capital raised via SEOs
will be larger for the firm with higher market overvaluation,
which im- plies that, although the firm issues SEOs when market
overvalua- tion is high the firm is mainly motivated to raise extra
capital to finance investment. Therefore, market timing does not
explain the motivation of the firm’s SEOs. However, if the
estimated coefficient b9 is negative and significant in (3), then we
can conclude that the firm is mainly motivated by timing the
market. The result of esti- mating model (3) is reported in column
(2) of Table 6. We can see that the estimated coefficient for b8 is
positive but insignificant,
1152 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157

i.e., investment undertaken by our sample firms does not really de-
b9 and b10 suggest that the firm that is relatively overvalued will
pend on the capital raised via SEOs. More importantly, the esti-
suffer more severely in terms of it’s the end-of-year post SEOs
mated coefficient for b9 is negative and significant. Putting
abnormal stock returns as compared to the firms that are less over-
together, the results on both b8 and b9 show that SEOs of our sample
valued. This result lends further support to the market timing
firms do not seem to be explained by financing for investment and
explanation.
growth theory, indirectly lending support to the market timing
In columns (4) and (5) of Table 6 we conduct further estima-
explanation.
tions to check the robustness of the results. In the literature, a
Next we apply the logic of estimating Eq. (3) to check how the
com- mon approach to testing market timing of equity issuance
market overvaluation affects the sensitivity of the firm’s end- of-
is to use long term stock returns, normally 3 years (e.g., Baker et
year abnormal stock reruns to SEOs. We estimate the following
al., 2003). Following this literature we use two longer term stock
model,
perfor- mance measures: (a) the firm’s average daily stock
reruns over

Returna ¼
b t 0 þ b1Industryt þ b2Gapt þ b 3Sizet þ b 4Profit t
þ b5Debtt þ b6Volatilityt þ b7Growtht þ
b8Investmentt
þ b9SEOCapitalt þ b10SEOCapitalt m Overvaluet
þ b11 Ov er v aluet þ et
Here we are interested in
a next 3 years after the current SEOs since this dummy variable is
@Returnt
¼ þ Overvaluet:
@SEOCapitalt
b9 b10
If the estimated coefficients for both b9 and b10 are negative and sig-
nificant in Eq. (4), then the end-of-year abnormal stock returns will
be lower for firms with higher market overvaluation. If the firm
with high market overvaluation faces more severe decline in post
SEOs stock reruns as compared to low market overvaluation firms,
then it suggests that market timing explains why the firm issues
SEOs. The result of estimating Eq. (4) is reported in column (3) of
Table 6. We observe that the estimated coefficient for b9 is signifi-
cant with a negative sign, consistent with the result we obtained
in column (1) of Table 6. More importantly, the estimated coeffi-
cient for b10 is negative and highly significant. The results on both
3 years after the current SEO (Returnt+3) ; (b) the firm’s average
abnormal stock returns over 3 years after the current
.
SEO Returnatþ3 Σ
, where the firm’s long term abnormal return is
computed by using the stock market index to adjust the firm’s long
term stock performance (e.g., DeAngelo et al., 2010). In this set of
ð4Þ
estimation we control for an additional variable, i.e., the dummy
variable (Next) indicating whether the firm has other SEOs in the
particularly relevant for testing the firm’s 3 year long term stock
performance. Again we see that the market timing theory is sup-
ported by evidence reported in columns (4) and (5) of Table 6. This
result suggests that more funds raised by SEOs will lead to larger
decline in both the firm’s long term stock returns and the firm’s
long term market adjusted abnormal stock returns, further con-
firming that market timing is an important motivation for our sam-
ple firms to conduct SEOs.
5.2. Does SEOs behavior differ between types of SEOs?
Different types of SEOs may contain different information for
both the market and shareholders. In particular in China, the two

Table 7
Motivations of SEOs between rights issues and public offerings. The sample period is from 1994 to 2008. The dependent variable is SEO proceeds/total assets in year t. The
independent variables are the same as those in Table 5. The figures in parentheses are the t-statistics, computed using the white (1980) heteroskedasticity consistent standard
error.

Rights issues Public offerings

(1) (2) (3) (4) (5) (6) (1) (2) (3) (4) (5) (6)

Constant 0.8951 1.1847 0.9139 0.8905 1.2263 0.9156 2.0164 2.0285 1.9694 2.0688 2.0919 2.0304
(8.95) (6.25) (6.94) (5.05) (6.44) (9.12) (6.88) (6.90) (7.04) (7.02) (6.95) (6.66)
Gapt—1 0.0052 0.0011 0.0033 0.0040 —0.0022 0.0027 0.0018 —0.0015 —0.0059 —0.0008 —0.0018 —0.0021
(1.92) (0.23) (0.92) (1.42) (—0.45) (0.97) (0.30) (—0.26) (—1.05) (—0.14) (—0.31) (—0.35)
Nextt —0.0134 —0.0275 —0.0209 —0.0251 —0.0253 —0.0220 —0.1310 —0.1434 —0.1199 —0.1438 —0.1371 —0.0886
(—1.47) (—1.74) (—1.83) (—2.70) (—1.62) (—2.64) (—2.39) (—2.62) (—2.25) (—2.63) (—2.47) (—1.61)
Sizet—1 —0.0354 —0.0453 —0.0353 —0.0346 —0.0464 —0.0307 —0.0853 —0.0858 —0.0798 —0.0867 —0.0863 —0.0784
(—7.50) (—5.22) (—5.50) (—6.75) (—5.39) (—6.46) (—6.65) (—6.72) (—6.49) (—6.75) (—6.81) (—6.05)
Profitt—1 0.6094 0.7222 0.5109 0.6896 0.7668 0.4493 1.1905 1.1865 0.6915 1.1375 1.1897 0.6267
(5.21) (3.44) (3.01) (5.53) (3.67) (3.67) (3.30) (3.33) (1.85) (3.09) (3.34) (1.61)
Debtt—1 —0.0759 —0.3602 —0.0865 —0.0689 —0.1152 —0.2968 —0.0036 0.1083 —0.0127 0.0236 0.0338 —0.2122
(—2.22) (—1.13) (—1.89) (—1.89) (—1.88) (—1.79) (—0.03) (0.25) (—0.13) (0.23) (0.34) (—0.50)
Volatilityt—1 3.1275 6.0500 2.4165 2.4656 6.2040 2.0621 13.1609 13.2634 11.3564 13.1485 13.0117 10.1097
(2.87) (3.09) (1.70) (2.16) (3.19) (2.04) (3.51) (3.57) (3.16) (3.57) (3.53) (2.71)
Growtht—1 0.0147 0.0114 —0.0174 —0.0582
(1.60) (1.35) (—0.64) (—2.02)
Investmentt—1 0.0388 0.0398 0.2839 0.2668
(1.04) (1.15) (1.52) (1.46)
Tradeofft—1 0.2452 0.2055 —0.0762 0.1567
(0.78) (1.26) (—0.18) (0.38)
Overvaluet—1 0.0055 0.0066 0.0019 0.0246
(2.01) (3.35) (2.36) (3.78)
EAEt—1 —0.0740 —0.0527 —0.2772 —0.1012
(—0.40) (—0.33) (—0.52) (—0.19)
—0.0906 —0.0730 —0.0539 —0.1001
(—1.65) (—2.64) (—0.63) (—1.19)
Industry Included Included Included Included Included Included Included Included Included Included Included Included
Ad.R-squared 0.1987 0.0951 0.1429 0.1584 0.0975 0.2501 0.3748 0.3738 0.4187 0.3748 0.3754 0.4201
F-statistic (p-value) 13.04 6.73 8.87 10.72 6.89 12.11 6.92 7.40 8.73 7.43 7.45 6.72
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Obs. 681 819 819 776 819 667 159 162 162 162 162 159
 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157 1153

main types of SEOs, i.e., rights issues and public offerings, are
regulated by the CSRC differently. For example, the number of
new shares issued in right issues was restricted to 30% of total
current shares, while in public offerings it was required that the
new funds raised cannot exceed the firm’s total equity in the
previous year. Controlling shareholders must make a promise to
subscribe a certain amount of shares prior to the shareholders’
general meeting in rights issues, while they could give up any
subscriptions in public offerings. Moreover, if the controlling
shareholders fail to fulfill the promise in rights issues, the issuers
must return all the funds to subscribed shareholders together with
the costs of funds. Consequently, the issue prices of the two types
of SEOs turn out to be different. The issue prices for rights issues
are much lower than the market price, while the issue prices for
public offerings are closer to the market price. Logically, firms
are expected to be more prudent in rights issues than in public
offerings. These may induce different SEOs behavior.
In this subsection, we check if SEOs motivation differs between
rights issues and public offerings. More specifically, we repeat the
estimations shown in Tables 5 and 6 for rights issues and public
offerings, respectively. The corresponding results are reported in
Tables 7 and 8. Table 7 shows that the estimated coefficient for
overvaluation (Overvalue) is positively significant in both
columns
(3) and (6) for both rights issues and public offerings, suggesting
that among other possible theories, timing the market is important
in explaining both rights issues and public offerings. However, in
Table 8 rights issues receives stronger evidence (columns (2), (3)
and (5)) that is consistent with the market timing explanation than
public offerings does (columns (1) and (5)), which indicates that
although both types of SEOs are mainly motivated by timing the
market, the firm uses more rights issues to take advantage of mar-
ket overvaluation than public offerings. This result is in line with
the SEOs practice in China. Since controlling shareholders must
subscribe in rights issues and the firm must bear the risk of issue
failure in rights issues, the firm has stronger incentive to time
the market in rights issues than in public offerings.
5.3. SEOs behavior over time
The empirical results we have obtained so far suggest that
the Chinese SEOs are in general dominated by timing the
market (Ta- bles 4–6 ) and the market timing result is slightly
different be- tween rights issues and public offerings in terms of
the extent to which market timing dominates (Tables 7 and 8).
Another question arises concerning whether Chinese listed
firms experience differ- ent SEOs behavior over time along with
the progress of China’s market transition. The progress of
market transition in China changes the condition of the capital
market on the one hand and influences the development of
corporate governance system of Chinese firms on the other.
Therefore it is relevant to examine fur- ther whether the SEOs
behavior of Chinese firms differs across dif- ferent periods and
whether these differences, if any, reflect the characteristics of
China’s market transition at different stages. For this purpose
we divide our sample period into three subsample periods: (a)
1994–1997; (b) 1998–2005; and (c) 2006–2008. The
first subsample period (1994–1997) is the set-up stage of Chinese
stock markets, during which the listing process was tightly con-
trolled by the government and the listed firms were mainly related
to the former state-owned enterprises. In this period the listed
firms were just starting to perform as modern corporations. In
the second subsample period (1998–2005), firms have gradually
established a modern corporate governance system. In 1998 Chi-
nese listed firms started formally and regularly to report corporate
governance information. Additionally, the institution of Board of

Table 8
Further evidence on market timing between rights issues and public offerings. The sample period is from 1994 to 2008. The dependent variable varies across estimations. The
independent variables are the same as those in Table 6. The figures in parentheses are the t-statistics, computed using the white (1980) heteroskedasticity consistent standard
error.

Rights Issues Public Offerings

(1) a
(2) (3) a
(4) (5) a
(1) a
(2) (3) a
(4) (5) a
Returnt Investmentt Returnt Returnt+3 Returntþ3 Returnt Investmentt Returnt Returnt+3 Returntþ3

Constant 0.0013 0.0422 —0.0025 0.0065 0.0032 0.0065 —0.3810 0.0077 —0.0064 —0.0030
(1.12) (0.39) (—2.24) (6.15) (4.78) (2.18) (—1.69) (2.53) (—1.50) (—1.22)
Gapt 0.00003 —0.0070 —0.00003 —0.00003 0.00005 0.00004 —0.0074 0.00001 0.0001 —0.00005
(1.32) (—2.75) (—1.25) (—0.10) (0.28) (0.89) (—2.08) (0.31) (1.97) (1.69)
Nextt 0.0004 0.0002 0.0011 0.0008
(5.51) (3.87) (1.92) (3.38)
Sizet 0.0000 0.0010 0.0001 —0.0003 —0.0005 —0.0003 0.0196 —0.0003 0.0002 0.0001
(—0.06) (0.19) (1.96) (—6.29) (—4.83) (—2.43) (2.02) (—2.68) (1.50) (1.11)
Profitt —0.0001 0.3196 0.0071 0.0012 —0.0006 0.0157 0.7143 0.0145 —0.0007 0.0015
(—2.17) (2.66) (5.46) (1.10) (—0.75) (3.37) (2.09) (3.13) (—0.12) (0.56)
Debtt 0.0118 0.0966 0.0013 0.0011 0.0004 0.0004 0.0380 0.0002 —0.0016 —0.0004
(8.82) (2.81) (3.56) (3.49) (1.67) (0.51) (0.49) (0.27) (—1.29) (—0.59)
Volatilityt 0.0022 —0.4046 0.0607 —0.0559 —0.0103 0.0619 1.9088 0.0621 0.0024 —0.0296
(5.80) (—0.39) (5.46) (—5.38) (—2.53) (1.99) (0.82) (2.00) (0.06) (—1.30)
Growtht 0.0002 0.0265 0.0002 0.00002 0.00002 0.00002 0.0074 0.0003 —0.00001 0.0001
(4.11) (4.28) (3.19) (0.48) (0.54) (2.97) (1.01) (3.24) (—0.12) (1.46)
Investmentt 0.0007 0.0008 0.0003 0.0001 0.0018 0.0015 —0.00007 0.0020
(1.77) (2.21) (1.05) (0.37) (1.59) (1.41) (—0.52) (1.78)
SEOCapitalt —0.00009 0.0197 —0.0002 —0.0002 —0.0002 —0.0024 0.0039 —0.0027 —0.0009 —0.0006
(—0.45) (1.07) (—1.28) (—1.28) (—1.69) (—3.65) (0.06) (—3.50) (—1.14) (—1.76)

SEOCapital t m Overvalue —0.0347 —0.0004 —0.0085 —0.00003

(—3.04) (—3.27) (—0.76) (—1.24)
Overvaluet 0.0047 0.0003 0.0045 0.0001
(1.29) (8.77) (0.71) (2.01)

Industry Included Included Included Included Included Included Included Included Included Included
Ad.R-squared 0.1709 0.0938 0.2743 0.1368 0.0619 0.1662 0.1170 0.1920 0.1087 0.0980
F-statistic 10.91 5.98 18.18 8.47 4.78 2.96 2.22 3.04 1.76 1.82
(p-value) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.04) (0.04)
Obs. 819 819 819 802 802 159 158 158 107 107
 11
54

Table 9
Motivation of SEOs over time. The dependent variable is SEO proceeds/total assets in year t. The independent variables are the same as those in Table 5. The figures in parentheses are the t-statistics, computed using the white (1980)
heteroskedasticity consistent standard error.

1994–1997 1998–2005 2006–2008

(1) (2) (3) (4) (5) (6) (1) (2) (3) (4) (5) (6) (1) (2) (3) (4) (5) (6)

Constant 0.6787 1.7570 1.6716 0.6424 1.7143 0.3494 1.0376 1.0439 0.8756 1.0238 1.0844 0.9130 1.9560 1.1617 1.9034 1.9425 1.9042 1.5405
(2.23) (2.35) (2.34) (2.21) (2.43) (0.95) (8.42) (7.60) (6.17) (7.79) (7.75) (7.55) (5.26) (1.74) (5.20) (5.33) (5.20) (2.01)
Gapt—1 —0.0107 —0.0012 —0.0024 —0.0086 0.0002 —0.0138 0.0094 0.0060 0.0030 0.0064 0.0049 0.0069 —0.0046 —0.0024 —0.0036 —0.0017 —0.0016 —0.0069
(—0.81) (—0.04) (—0.09) (—0.86) (0.01) (—0.94) (3.04) (1.69) (0.89) (2.00) (1.46) (2.21) (—0.61) (—0.31) (—0.47) (—0.24) (—0.22) (—0.82) H.
Nextt —0.0215 —0.0462 —0.0462 —0.0182 —0.0447 —0.0214 —0.0238 —0.0329 —0.0331 —0.0401 —0.0307 —0.0307 —0.1104 —0.1607 —0.1604 —0.1863 —0.1782 —0.1414 Bo
et
(—0.89) (—0.95) (—0.96) (—0.98) (—0.93) (—0.82) (—1.96) (—2.48) (—2.56) (—3.20) (—2.34) (—2.68) (—1.01) (—1.50) (—1.48) (—1.71) (—1.62) (—1.19)
al.
—0.0257 —0.0790 —0.0462 —0.0244 —0.0800 —0.0180 —0.0412 —0.0404 —0.0307 —0.0413 —0.0408 —0.0319 —0.0793 —0.0727 —0.0753 —0.0774 —0.0776 —0.0776 /
Sizet—1 (—1.73) (—2.32) (—2.16) (—1.71) (—2.34) (—1.07) (—7.33) (—6.19) (—4.58) (—6.86) (—6.51) (—5.38) (—4.94) (—4.64) (—4.81) (—4.97) (—4.90) (—4.53) Jo
Profitt—1 0.6825 1.4298 1.3048 0.7469 1.4337 0.4159 0.6807 0.6865 0.3306 0.7219 0.7099 0.4225 0.1500 0.8765 0.4577 0.6602 0.5689 0.3850 ur
(1.70) (1.79) (1.55) (2.17) (1.80) (0.88) (5.02) (4.64) (1.93) (5.09) (4.80) (2.89) (0.20) (1.19) (0.60) (0.92) (0.78) (0.42) na
Debtt—1 —0.0046 —0.2449 —0.1167 —0.0362 —0.0996 0.6877 —0.0235 —0.0806 —0.0931 —0.0175 —0.0261 —0.0958 —0.1130 1.9145 —0.0487 —0.0794 —0.0461 1.0935 l
of
(—0.03) (—0.15) (—0.46) (—0.35) (—0.40) (1.06) (—0.59) (—0.33) (—2.00) (—0.41) (—0.59) (—0.46) (—0.75) (1.29) (—0.33) (—0.54) (—0.31) (0.60)
Ba
Volatilityt—1 —0.4617 8.3345 8.1590 —1.8389 8.4305 0.3652 4.3769 5.2880 4.4450 5.2346 5.3948 3.4694 6.3189 6.5257 5.1994 5.5724 5.2693 6.4159
nk
(—0.15) (1.40) (1.37) (—0.79) (1.41) (0.11) (3.05) (3.28) (2.79) (3.45) (3.39) (2.58) (1.33) (1.38) (1.08) (1.22) (1.10) (1.26) in
Growtht—1 —0.0010 0.0009 0.0075 0.0002 0.0070 0.0067 g
(—0.03) (0.02) (0.67) (0.02) (0.22) (0.17) &
Investmentt—1 0.3620 0.3630 0.0070 0.0164 0.3281 0.2538 Fi
na
(2.57) (2.45) (0.14) (0.37) (1.71) (1.14)
nc
Tradeofft—1 0.1369 —0.7203 0.0534 0.0276 —1.8979 —1.1378
e
(0.09) (—1.13) (0.22) (0.13) (—1.34) (—0.65) 35
Overvaluet—1 0.0085 0.0041 0.0113 0.0106 0.0053 0.0059 (2
(0.46) (0.36) (4.01) (4.44) (0.68) (0.63) 01
EAEt—1 0.3535 0.3665 —0.1813 —0.1628 —0.8948 —0.8187 1)
(0.89) (0.65) (—0.82) (—0.86) (—1.06) (—0.87) 11
43
0.0464 0.0604 —0.0632 —0.0827 0.0753 —0.0071
–
(0.26) (0.70) (—1.44) (—2.26) (0.61) (—0.05)

Industry Included Included Included Included Included Included Included Included Included Included Included Included Included Included Included Included Included Included
Ad.R-squared 0.0888 0.0534 0.0540 0.0931 0.0537 0.0762 0.1806 0.1375 0.1572 0.1540 0.1402 0.2306 0.3727 0.3787 0.3636 0.3713 0.3625 0.3428
F-statistic 1.86 1.82 1.83 2.24 1.82 1.65 10.12 8.49 9.76 9.45 8.65 10.78 3.69 3.80 3.62 3.71 3.61 2.77
(p-value)
(0.04) (0.03) (0.03) (0.00) (0.03) (0.08) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Obs. 108 205 205 171 205 103 663 706 706 697 706 654 69 70 70 70 70 69
Table 10
Further evidence on market timing over time The dependent variable varies across estimations. The independent variables are the same as those in Table 6. The figures in parentheses are the t-statistics, computed using the white (1980)
heteroskedasticity consistent standard error.

1994–1997 1998–2005 2006–2008

(1) (2) (3) (4) (5) (1) (2) (3) (4) (5) (1) (2) (3) (4) (5)
Returnat Investmentt Returnt+3 Returna Return t Investmentt Returnt+3 Returna Return t Investmentt Returnt+3 Returna
t tþ3 t tþ3 t tþ
3
a a

Returna Returna Returna

H.
Constant —0.0065 0.1639 —0.0070 0.0099 0.0080 0.0028 —0.1576 —0.0015 —0.00001 0.0006 0.0020 —0.9835 —0.0068 na na Bo
(—2.61) (0.94) (—3.09) (7.84) (6.28) (2.37) (—1.26) (—1.24) (—0.01) (0.89) (0.35) (—3.35) (—0.49) et
Gapt 0.0006 —0.0076 0.00005 0.00001 0.00003 0.00006 —0.0054 0.00001 0.0001 0.00005 0.00007 —0.0089 —0.0001 na na al.
(0.78) (—1.30) (0.75) (0.25) (0.76) (2.46) (—2.10) (0.58) (4.15) (3.00) (0.87) (—1.94) (—0.75) /
Nextt 0.0002 0.0002 0.0005 0.0003 na na Jo
ur
(2.41) (2.32) (4.95) (3.92)
na
Sizet 0.0002 —0.0046 0.0003 —0.0004 —0.0004 —0.0002 0.0092 0.00006 —0.00002 —0.00004 —0.0001 0.0462 0.0002 na na l
(2.09) (—0.54) (2.95) (—6.83) (—6.04) (—3.22) (1.58) (1.08) (—0.32) (—1.10) (—0.55) (3.71) (0.32) of
Profitt 0.0160 0.0244 0.0089 —0.0027 —0.0027 0.0094 0.5868 0.0051 0.0023 0.0002 0.0126 0.4134 0.0336 na na Ba
(6.98) (0.13) (3.77) (—2.24) (—2.25) (6.43) (3.95) (3.51) (1.63) (0.18) (1.43) (0.84) (1.43) nk
Debtt 0.0017 —0.0101 0.0011 0.0009 0.0008 0.0015 0.1566 0.0006 0.0003 0.00009 0.0010 0.0372 —0.0004 na na in
g
(2.10) (—0.17) (1.43) (2.09) (1.94) (4.05) (3.96) (1.78) (1.00) (0.38) (0.58) (0.36) (—0.07)
&
Volatilityt 0.0450 0.7710 0.0431 0.0050 —0.0122 0.0744 —0.8871 0.0697 —0.0556 —0.0350 —0.0093 2.8816 0.1849 na na Fi
(1.97) (0.48) (2.08) (0.43) (—1.03) (6.06) (—0.74) (6.03) (—4.81) (—4.55) (—0.14) (0.88) (1.20) na
Growtht 0.0001 0.0342 0.00004 —0.00002 —0.00006 0.0003 0.0133 0.0002 0.00009 0.00009 0.0010 —0.0114 0.0034 na na nc
(1.30) (4.63) (0.44) (—0.05) (—0.11) (5.18) (2.30) (5.11) (1.69) (2.41) (1.54) (—0.31) (3.01) e
Investmentt 0.0014 0.0014 —0.0007 —0.0007 0.0012 0.0013 0.0006 —0.00004 —0.0024 —0.0062 na na 35
(2
(1.37) (1.55) (—1.37) (—1.27) (3.31) (3.59) (1.64) (—0.16) (—1.06) (—1.04)
01
SEOCapitalt 0.0003 —0.0009 0.0001 0.00001 —0.00003 —0.0011 0.0643 —0.0011 —0.0009 —0.0005 —0.0027 0.0996 0.0082 na na 1)
(1.33) (—0.05) (0.49) (0.09) (—0.22) (—3.78) (1.97) (—3.51) (—3.24) (—2.73) (—1.80) (1.17) (2.52) 11
SEOCapitalt —0.0232 —0.0005 —0.0267 —0.0002 —0.0042 —0.0012 na na 43
m Overvalue –
(—1.46) (—2.62) (—3.23) (—2.79) (—0.14) (—1.67)
Overvalue t 0.0043 0.0005 0.0037 0.0003 —0.0024 0.0001 na na
(0.64) (5.75) (1.10) (8.72) (—0.26) (0.41)

Industry Included Included Included Included Included Included Included Included Included Included Included Included Included na na
Ad.R-squared 0.2551 0.0944 0.3840 0.2841 0.2470 0.1972 0.0995 0.2918 0.1098 0.0816 0.1008 0.1523 0.2430 na na
F-statistic 5.65 2.32 8.48 6.06 5.18 11.82 5.58 17.11 6.10 4.67 1.74 2.18 2.41 na na
(p-value)
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.09) (0.03) (0.01)
Obs. 205 205 205 205 205 706 705 705 706 704 67 67 67 na na

11
55
1156 H. Bo et al. / Journal of Banking & Finance 35 (2011) 1143–1157
Directors was introduced around 2001. Hence it can be seen that
the listed firms at this stage had formal corporate governance
sys- tem in place. We only had a few SEOs cases in 2005 when
the own- ership split reform was initiated in April 2005. Since
these SEOs cases in 2005 took place before April 2005, we
include 2005 into the second subsample period. Finally, the third
subsample period (2006–2008) may reflect some effects of the
ownership split re- form. Non-tradable shares in theory were
merged with tradable shares in this period, but in practice there
are still a significant amount of non-tradable shares in Chinese
listed firms during this period. In sum, given these
characteristics regarding China’s mar- ket transition, the listed
firms should respond to internal and external environment
differently regarding their SEOs decisions. Again we repeat the
estimations in Tables 5 and 6 for the three subsample periods,
respectively. The results are displayed in Tables 9 and 10.11
It is interesting to observe from Tables 9 and 10 that there are
indeed differences in SEOs behavior across different subsample
periods. In the first subsample period (1994–1997), the estimated
coefficient for financing for investment (Investment) is positive and
significant in both columns (1) and (6) of Table 9. In the meantime,
the estimated equation shown in column (3) in Table 10 for the
period of 1994–1997 provides a piece of evidence confirming the
market timing theory. Putting together, the results in Tables 9 and
10 suggest that the sample firms during 1994–1997 were pos- sibly
motivated by both the market timing and financing for investment
when they issue SEOs, although it seems that financing for
investment dominates. As we have already mentioned that at the
beginning of establishing the Chinese stock market, the govern-
ment had hold a tight control of the listing process. Consequently,
the firms selected to be listed were of good quality in general and
had great growth potential. This may explain the result that in
addition to the market timing explanation, SEOs during this period
were also motivated by financing for investment and growth. This
result is also consistent with the Chinese practice in that Chinese
stock markets were initially designed and used mainly for provid-
ing the loss-making state-owned enterprises with a fresh channel
to raise external capital.
In contrast, the results in both Tables 9 and 10 strongly support
that market timing dominates other theories for SEOs activities
during 1998–2005. The estimated coefficient for overvaluation
(Overvalue) is highly positively significant in both columns (3)
and (6) in Table 9 for the period of 1998–2005. In addition, all
the estimated equations in Table 10 for this period confirm the
market timing theory (see columns (1)–(5) for the period of 1998–
2005). This result is also consistent with the practice of Chi- nese
stock markets. As we mentioned earlier, in the subsample period
1998–2005, the number of listed firm had grown very fast and this
was the period of the majority of SEOs activities took place. The
firms quickly learned from the market practice, timing the market
became a dominating motivation for SEOs in this peri- od. Finally,
in the subsample period after the ownership split re- form (2006–
2008), the result is a mixture of both financing for investment and
market timing theories. Column (1) in Table 9 for the period of
2006–2008 shows that financing for investment is important for
SEOs in this period, while columns (1) and (3) of Table 10 for the
period of 2006–2008 provide some evidence sup- porting the
market timing theory in this period. Two reasons may help explain
the SEOs behavior in the post-2005 period in China: firstly, the
ownership split reform has brought about improved corporate
governance, hence financing for investment became
11
Because our sample period ends in 2008, there are no observations for 3 year
stock returns after the current SEOs. Hence it is impossible to obtain results for long
term stock returns estimations in columns (4) and (5) in Table 10 for the period of
2006–2008.
important in addition to timing the market; and secondly, public
offerings dominated in this period (see Table 1), and thus, firms
have less incentives to time the market (see Section 5.2).
6. Conclusions
Our understanding on the seasoned equity offerings (SEOs)
behavior is mainly based on firms in mature market economies, lit-
tle is known about Chinese firms in this respect. In this paper we
use Chinese SEOs during 1994–2008 to examine the empirical rel-
evance of standard theories explaining the motivation of SEOs.
After controlling for other factors that reflect features of Chinese
corporate financing, we find that Chinese listed firms are mostly
motivated by market timing to issue SEOs. Financing for invest-
ment and growth has received weak empirical support. However,
the tradeoff theory is not supported by our data. Moreover, we
do not obtain any evidence supporting the notion that controlling
shareholders conduct SEOs to exploit minority shareholders, which
has been claimed in the previous literature on Chinese SEOs. We
provide evidence that timing the market is the most relevant
explanation of SEOs behavior in China. In addition, we also find
that Chinese firms’ SEOs behavior varies between rights issues
and public offerings and across different periods along with the
progress of China’s market transition. In sum, our result shows that
Chinese listed firms in general behave similarly as their counter-
parts in other countries concerning SEOs decisions in that they
issue SEOs when there are opportunities to take advantages of
market overvaluation. This result is consistent with the well-
documented convergence trend of corporate SEOs behavior of
firms across different countries (e.g., Kim and Weisbach, 2008;
Henderson et al., 2006). In addition, our result challenges the con-
ventional perception on Chinese SEOs that Chinese listed firms are
mainly motivated by the expropriation of minority shareholders by
controlling shareholders when they issue SEOs.
Acknowledgements
The authors thank Tao Li for providing us with part of the data
used in the paper, and Valen Sun for research assistance.
Changyun Wang gratefully acknowledges the financial support
from the National Science Fund for Distinguished Young Scholars
(No.: 70725003). We thank anonymous referees for helpful
comments and suggestions on an earlier version of the paper.
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