This thesis studies equity financing behaviors in the developing Chinese financial market, with focus placed on the importance of corporate governance to Chinese companies’ financing behavior. Active equity raising activities despite low levels of corporate governance and investor protection is a puzzle in China. A corporate governance indicator based on the completion of the Split Share Structure Reform is introduced. The reform improved corporate governance in China. The results suggest that corporate governance does not influence Chinese companies’ incremental financing decisions, which implies that Chinese investors invest regardless of corporate governance. This phenomenon can be attributed to limited investment choices and the state’s dominance of capital allocation in China. However, improvements in corporate governance are perceived positively by Chinese investors. The results imply that seasoned equity offering (SEO) issuers before and after the reform are different. SEO issuers after the reform are perceived positively by the market while SEO issuers before the reform are perceived negatively.
Chapter Two examines the determinants of Chinese SEO issuers’ equity levels. This chapter uses the Monte Carlo simulation method developed by Barraclough (2008) to confirm that spurious correlation is a potential problem for traditional regression models of capital structure due to ratios on both sides of the equation. A dynamic system GMM using level variables is proposed as the superior model among the alternatives. Adjustments are made to the models to investigate the determinants behind a firm’s incremental managerial adjustments to equity level because equity level itself is a cumulative measure of past financing policies and share price movements. The results suggest that corporate governance does not influence Chinese companies’ incremental adjustments to equity. However, evidence is found for the importance of the identity of the controlling shareholders. Companies with state background enjoy privileged access to equity finance. Yet, despite such priority, they do not issue as much equity as the other companies. In addition, some evidence is found for the trade-off model, the market timing theory and the agency-cost-based model.
Chapter Three studies the determinants behind Chinese companies’ decisions to make seasoned equity offerings. Probit regressions are employed and Barraclough (2008)’s Monte Carlo simulation method is employed to confirm the non-existence of the spurious correlation problem found in traditional models of capital structure. Similar to Chapter Two, no evidence to support the importance of corporate governance is found. In addition, the results indicate that although state controlled enterprises enjoy privileged access to equity, equity is not the preferred source of capital — particularly before the Global Financial Crisis. Different factors have been observed to affect Chinese firms’ SEO decisions prior to and post the Split Share Structure Reform. The influence from the state has been also weakened after the reform, particularly after the financial crisis.
Chapter Four studies the announcement effects of seasoned equity offerings in China. The market reacts to SEO announcements negatively before the Split Share Structure Reform and positively after the reform. However, after I correct for sample selection bias by employing a Heckman’s sample selection model, the significant announcement effects and the difference between announcement effects prior to and post the reform generally disappear, which indicates the existence of a sample selection bias. It implies that it is the difference between the common features of the issuers prior to and post the reform that contribute to the opposite announcement effects before and after the reform. Furthermore, some evidence has been found to support a negative relation between information asymmetry and SEO announcement effects. The weakening of government influence in the Chinese financial market is further confirmed.