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Does having a credit rating leave less money on the table when raising capital? A study of credit ratings and seasoned equity offerings in China

Author

Listed:
  • Poon, Winnie P.H.
  • Chan, Kam C.
  • Firth, Michael A.

Abstract

We examine the impact of unsolicited credit ratings on seasoned equity offering (SEO) underpricing in China using issuer credit rating data of listed companies on the Shanghai and Shenzhen Stock Exchanges for the period 2002 to 2009. Our findings suggest that, after controlling for other factors, a SEO firm in China with a credit rating is able to reduce its SEO underpricing, on average, by 11.89% to 14.33%. In addition, we find that the underpricing of an SEO firm that receives a speculative-grade credit rating is not significantly different from an SEO firm with an investment-grade rating. Thus, SEO firms appear to benefit from receiving an unsolicited rating. In general, credit ratings reduce information asymmetry and hence leave less money on the table when raising capital. This may lead firms to actively solicit credit ratings in the future, especially those who plan to access the capital markets.

Suggested Citation

  • Poon, Winnie P.H. & Chan, Kam C. & Firth, Michael A., 2013. "Does having a credit rating leave less money on the table when raising capital? A study of credit ratings and seasoned equity offerings in China," Pacific-Basin Finance Journal, Elsevier, vol. 22(C), pages 88-106.
  • Handle: RePEc:eee:pacfin:v:22:y:2013:i:c:p:88-106
    DOI: 10.1016/j.pacfin.2012.10.003
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    References listed on IDEAS

    as
    1. Winnie P. H. Poon & Michael Firth, 2005. "Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1741-1771.
    2. Chen, Kevin C.W. & Wang, Jiwei, 2007. "Accounting-based regulation in emerging markets: The case of China's seasoned-equity offerings," The International Journal of Accounting, Elsevier, vol. 42(3), pages 221-236.
    3. Lin, Chen & Su, Dongwei, 2008. "Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 405-417, September.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    5. Kenneth A. Kim & Hyun-Han Shin, 2004. "The Puzzling Increase in the Underpricing of Seasoned Equity Offerings," The Financial Review, Eastern Finance Association, vol. 39(3), pages 343-365, August.
    6. Shane A. Corwin, 2003. "The Determinants of Underpricing for Seasoned Equity Offers," Journal of Finance, American Finance Association, vol. 58(5), pages 2249-2279, October.
    7. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    8. Mola, Simona & Loughran, Tim, 2004. "Discounting and Clustering in Seasoned Equity Offering Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(01), pages 1-23, March.
    9. Wei Luo & Pingui Rao & Heng Yue, 2010. "Information Risk and Underwriter Switching in SEOs: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 905-928.
    10. Wang, Junbo & Wei, K.C. John & Pruitt, Stephen W., 2006. "An analysis of the share price and accounting performance of rights offerings in China," Pacific-Basin Finance Journal, Elsevier, vol. 14(1), pages 49-72, January.
    11. An, Heng (Hunter) & Chan, Kam C., 2008. "Credit ratings and IPO pricing," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 584-595, December.
    12. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    13. Winnie P. H. Poon & Junsoo Lee & Benton E. Gup, 2009. "Do Solicitations Matter in Bank Credit Ratings? Results from a Study of 72 Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 285-314, March.
    14. Poon, Winnie P.H. & Chan, Kam C., 2008. "An empirical examination of the informational content of credit ratings in China," Journal of Business Research, Elsevier, vol. 61(7), pages 790-797, July.
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    Cited by:

    1. repec:kap:rqfnac:v:49:y:2017:i:3:d:10.1007_s11156-016-0607-8 is not listed on IDEAS
    2. Shen, Jianfu & Firth, Michael & Poon, Winnie P.H., 2016. "Credit Expansion, Corporate Finance and Overinvestment: Recent Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 16-27.
    3. repec:eee:reveco:v:54:y:2018:i:c:p:206-217 is not listed on IDEAS
    4. Korkeamäki, Timo & Pöyry, Salla & Suo, Maiju, 2014. "Credit ratings and information asymmetry on the Chinese syndicated loan market," China Economic Review, Elsevier, vol. 31(C), pages 1-16.

    More about this item

    Keywords

    Seasoned equity offerings; Credit rating; Information asymmetry;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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