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Does the truth rest with the minority? Divergent views on nonfinancial firms' financial investments from the private equity market

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  • Huang, Yong
  • Yan, Chao
  • Chan, Kam C.

Abstract

We investigate how the seasoned equity market evaluates nonfinancial firms that recently bought wealth management products (WMPs). Using a sample of Chinese firms, we find that the stock market reacts less positively to private equity placements (PEPs) by firms that recently purchased WMPs (i.e., quasi-deposits) than to those that did not. Further analysis suggests that compared with retail investors, sophisticated (i.e., institutional and high-net-worth) investors pay a higher price for the shares of these WMP-buying firms. After PEPs, we find that the long-term operating performance and firm value of WMP-buying firms are higher than those of non-buying firms. Overall, the findings suggest that: (i) engaging in shadow banking activities (buying WMPs) does not mean a firm is distracted, and (ii) sophisticated investors are less concerned than retail investors about a firm's shadow banking activities.

Suggested Citation

  • Huang, Yong & Yan, Chao & Chan, Kam C., 2022. "Does the truth rest with the minority? Divergent views on nonfinancial firms' financial investments from the private equity market," International Review of Financial Analysis, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:finana:v:83:y:2022:i:c:s1057521922002228
    DOI: 10.1016/j.irfa.2022.102264
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