To Analyze the Probability of SEO Authorized, We May First Analyze the Financial Factors
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The Behavior Analysis of Supervisory Department and Listed Company of Seasoned Equity Offerings Application with the Game Theory
Wu Shu-tong1, Luo Yong-tai2, Yao Yi-na3 1 Doctor of School of Commerce, Tianjin University of Finance and Economics, P.R. China, 300222 2 Professor of School of Commerce, Tianjin University of Finance and Economics, P.R. China, 300222 3 Graduate of School of Economics, Tianjin University of Finance and Economics, P.R. China, 300222
Abstract: With great increase of stock index in domestic shown in Fig.1. The real estate companies played the stock market, more and more liquidity flows into stock leading role in the aspect of fundraising amount. Beijing market and meanwhile, amount of listed companies Urban Construction Group Co., Ltd., Financial Street come into refinancing. At present, SEO (Seasoned Equity Holding Co., Ltd., Chongqing YuKaifa Co., Ltd. are the Offerings) has already been the mainstream in the mode three of six companies which financed over a hundred of listed companies’ equity refinancing. Until May, 2007, million respectively in the first quarter of 2007. 167 listed companies have brought SEO into effect. Form Jan, 2006 to Jun, 2007, 76 listed companies Nevertheless, more than 20 listed companies’ SEO put forward the SEO , in which 65 were passed and 10 schemes were voted down at the same time, which were voted down, and Shandong Chenming Paper means the process of SEO is not the royal road. To Holdings Ltd., AnHui BBCA Biochemical Co., Ltd. illustrate the signaling process of SEO between listed stopped and withdrew respectively because of their own companies and supervisory department in China, reasons. Until Jul, 2007, there were 20 applications were influences caused to the SEO authorized probability by voted down, which means the process of SEO is not the financial and non-financial factors were analyzed by royal road. using logistic model in this paper, and a signaling model which is one of dynamic games of incomplete 2. Influence of financial factors to the information was constructed combining the factors probability of SEO authorized which influence SEO authorized. At last, to improve the validity of signal in SEO, some advices were put To analyze the probability of SEO authorized, we forward, such as listed companies must increase the may first analyze the financial factors which affect the transparence of management, supervisory department probability. should improve the qualification of SEO application and increase punishment to the illegal operation of listed 2.1 Selecting the data of samples companies, which in order to improve the quality of The financial data of the year before SEO of 106 listed companies of SEO application. listed companies was selected as the authorized data, Keywords：Influence Factors, SEO, Signaling Model which successfully brought SEO into effect of domestic stock market at stock exchange in Shenzhen Stock 1. The general situation of SEO in China Exchange and Shanghai Stock Exchange from Jan. 1, 2006 to Jul.31, 2007. At the same time, the financial data With great increase of stock index in domestic stock of the year before SEO of 25 rejected listed companies market, more and more liquidity flows into stock market was selected as the rejected data. The source of all the and meanwhile, amount of listed companies come into data in this paper was from GuoTaian Database, Annals refinancing. At present, there are 3 main methods to of Listed Company, the Website of Shenzhen Stock refinance: SEO (Seasoned Equity Offerings), right Exchange and Shanghai Stock Exchange and the Website offerings and transferable bonds. Before 2000, the of China Securities Regulatory Commission, and all of primary method to refinance of listed company is in form them were analyzed by using SPSS11.5 software. of right offerings, SEO is only used by unqualified ones to assets restructuring, and therefore only 12 companies 2.2 Model establishment brought SEO into effect in 1998 and 1999. Until March, Because of the dummy dependent variables 2001, when
90 Manufacturing 82 80 Real estate
70 Producing and Supplying of 60 electric power, gas and water Mineral industry 50 Architecture 40 Finance and Insurance 30 20 Orher Service 12 9 10 5 Integration 3 3 3 3 1 0 Farming, Forest, Herd and Fig.1 Distribution of industry of listedFishing companies
p Manufacturing, Real estate, Service and others. When the denoted as dependent variable, i.e. Y=Ln ( ). 1 p company was of Manufacturing, ZZY was 1, otherwise, (2) Explanatory variables: ZZY was 0; When the company was of Real estate, FDC was 1, otherwise, FDC was 0; When the company was of X1 represents the size of company, denoted by the natural logarithm of the assets of the year before SEO; Service, FWY was 1, otherwise, FWY was 0. Therefore the regression model was established as X2 represents ROE (Rate of Return on Common Stockholders’ Equity), denoted by the average of 3 years follows: Y=f(X1, X2, X3, X4, ZZY, FDC, FWY) before SEO; X3 represents liquidity ratio of the year before SEO; X4 represents P/E (Price/Earning) of the year before SEO. In addition, industry was introduced as 2.3 Results and Analysis the dummy variable, and 131 companies who have It was shown from Tab.2 that the Wald results- passed SEO were divided to 4 categories: P(Sig) of X1, X2, X4,ZZY、FDC and FWY were exceed 0.05,
Tab.2 Result of logistic model B S.E. Wald df Sig. Exp(B) Step 1(a) X1, .197 .287 .474 1 .491 1.218 X2,, .197 .322 .376 1 .540 1.218
X3, 2.802 .845 11.010 1 .001 16.482
X4, .006 .007 .630 1 .427 1.006 ZZY .431 .644 .449 1 .503 1.540 FDC -.313 .669 .219 1 .640 .731 FWY -.335 .300 1.243 1 .265 .716 Constant -5.684 6.563 .750 1 .387 .003 a Variable(s) entered on step 1: X1,X2, X3, X4, ZZY, FDC, FWY. improve the EPS. If the EPS will be diluted, the which means at the 95% significant level, the size of significance l of the financing can not be fulfilled. At company, ROE, P/E and industry category could not present, private placement plus purchasing big notably affect the probability of SEO authorized, but the shareholders’ assets is the most popular mode of SEO. liquidity ratio could. It was shown from the verified But this mode may result in increasing the big result that when liquidity ratio increased one unit, the shareholders’ liquidity and do harm to minority proportion of probability of authorized and rejection shareholders. So supervisory department is prudent in would increase e times, i.e. 16.482 times. So when the examining this mode of private placement applications and applies a compulsory guideline that EPS can not be supervisory department censors application of SEO, the diluted as well as the asset value can not be decreased risk of repayment in short term of the company is more after SEO. It is obvious that, to the SEO scheme in which concerned. big shareholders purchase their assets, if the EPS will decrease, the scheme may not be authorized. 3．Influence of other factors to the (4) The issuing price can not be too low to keep the probability of SEO authorized benefit of shareholders of circulating shares. Low price will arouse chances of easily gained profit and the Reviewed some of the SEO schemes which has emergence of great space for arbitrage，which may hurt been voted down, the writer recognizes that except for minority shareholders’ benefits, while the protection of the requirement of relative rules, such as
Natur e H L
Listed Company Listed Company
S S
Supervisory Supervisory Department Department
Approve Reject Approve Reject
Z Z Z Z 1 2 3 4 Fig.2 Game tree
Tab. 3 Payoffs of supervisory department and listed company Listed Company Supervisory Department H R Z (1 s)(H R) s(H R) 1 A Z2 H I(1 r) (1 s)A L R Z (1 s)(L R) s(L R) 3 A L R Z4 L I(1 r) A 4.1 Pooling Equilibrium I(1 r) R L s (7) For listed company, the equilibrium strategy of SEO L R L R at proportion‘s’ must satisfy (1 s)( / R) / . Because i.e. R I(1 r) ( L) (8) R R R R L , if s , then s . When H I(1 r) ( L) , R satisfies that H R L R L R H R H For supervisory department, authorizing SEO L I(1 r) ( L) R H and pooling equilibrium schemes must be based on two considerations. One is H that ensure the benefits of investors, namely, L exists. When H I(1 r) ( L) , pooling sqH (1 q)L R I(1 r) . The other is that EPS can H H R L R equilibrium does not exist. not be diluted, namely, q (1 q) . A A (1 s)A Analyses above means supervisory department will So, supervisory department authorizes the SEO only if approve the SEO scheme at a lower equity proportion if I(1 r) qH (1 q)L R he believes that the future profit of listed company is H. s . qH (1 q)L R qH (1 q)L R Otherwise, SEO scheme is required to be at a higher Therefore, the pooling equilibrium condition of equity proportion. Even though the real profit in the future of listed company is H, he also pays the cost putting forward the SEO scheme for listed company and authorizing SEO scheme for supervisory department is: because supervisory department do not believe it. If the cost exceeds the profit of the new project, listed I(1 r) qH (1 q)L R s company has to give up. qH (1 q)L R qH (1 q)L R (1) R 4.2 Separating Equilibrium s H R When listed company anticipates that its profit in I(1 r) (1) Condition (1) can be transferred to be (2) when the future is H, the equity proportion of SEO is , q 1: H R I(1 r) I(1 r) R H i.e. s . The SEO scheme will be voted down s H R H R H R (2) I(1 r) I(1 r) R because . s H R qH (1 q)L R H R R H R When listed company anticipates that its future Because H , R H R and . I(1 r) I(1 r) H R H R profit is L, the equity of SEO is , i.e. s . Condition (2) transfers to be (3): L R L R I(1 r) R I(1 r) I(1 r) s (3) Although , separating H R H R L R qH (1 q)L R For R I(1 r) , condition (3) is satisfied. So, the pooling equilibrium will also need the condition that: equilibrium of the model must exist. I(1 r) qH (1 q)L R (9) (2) Condition (1) transfers to be (4) when q 0 : L R qH (1 q)L R I(1 r) R L Because H R qH (1 q)L R and s L R L R R L qH (1 q)L R , (4) R R L qH (1 q)L R I(1 r) R L s . If H R H R qH (1 q)L R L R H R R L R L I(1 r) qH (1 q)L R a. If , i.e. R H , is established, is also L R H R H L R qH (1 q)L R R R L s . Condition (4) transfers to be： established. So, condition (7) transfers to be: H R L R I(1 r) R L (10) I(1 r) R L R H R s (5) L R H R H R So, R I(1 r) L (11) I(1 r) R H L I(1 r) (6) L R R Therefore, if profit in the future is L, the SEO scheme So, pooling equilibrium exists only if H R R I(1 r) L I(1 r) would be authorized when . R H L I(1 r) . L R R Analyses above means that the listed company of R L R L higher profit in the future has to give up when R H b. If , i.e. , H R L R H R H R I(1 r) L , because he can not project R L R L R s . 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