Wealth transfers and propping behavior in Chinese rights issues

Compared to relying solely on price discounts, the wealth transfers can better capture the interplay between price discounts, offer size, and participation rates in rights issues. This paper investigates the underlying determinants of wealth transfers and post-issue stock performance within the Chinese rights issue market. We document that although the high pre-issue ROE threshold imposed by the CSRC could screen out financially distressed firms, these issuers subsequently suffer from severe medium-term underperformance. Furthermore, we reveal that non-tradable shares significantly exacerbate wealth transfers, whereas the split-share structure reform effectively mitigates the magnitude of wealth transfers. We find that rights issues with lower wealth transfers tend to exhibit better post-issue stock performance. Crucially, we document that controlling and major shareholders in concentrated ownership firms drive higher participation rates compared to their counterparts in dispersed ownership firms, and issuers with higher participation rates tend to exhibit better post-issue stock performance, which is consistent with the existence of propping. These findings yield novel insights into the behavioral responses of shareholders under rigid financing thresholds and external macro shocks.