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Essays on information and corporate finance

Zhu, Xingchen (2019). Essays on information and corporate finance. (Unpublished Doctoral thesis, City, University of London)

Abstract

This dissertation includes three essays on information and corporate finance.

In Chapter 1 (joint with Weihan Ding), we study the optimal disclosure policy in security issuance using a Bayesian persuasion approach. An issuer designs a signal to persuade an investment bank to underwrite. The bank forms a posterior on the basis of the signal and makes its underwriting and retention decisions. When there is no demand uncertainty, a partially informative disclosure is enough to curb primary market underpricing due to informed sales by the underwriter in the secondary market. When demand is uncertain, the underwriter may shy away because of more retention than his privately optimal level and larger losses due to increased total cost of capital. The optimal disclosure can solve such hold-up problem resulting from weak demand and induce the bank to underwrite. We derive predictions on the effects of the issuer's fundamentals, the underwriter's cost of capital, the demand uncertainty, and the market liquidity on the informativeness of the optimal disclosure. Our model not only captures the adverse selection problem in the originate-to-distribute lending model, but also rationalizes the phenomenon that arrangers may be willing to provide underwriting guarantee and retain large and costly stakes in leveraged loan syndication. Finally, if viewed as an extant blockholder, we show that the underwriter may exert governance by exit to promote more transparent disclosure by the issuing firm.

Chapter 2 has been removed for copyright protection reasons

In Chapter 3, we present evidence of tunneling by large shareholders via the abuse of private placement (PP) of public equity. Using data from China stock markets where PP is the most prevailing way of refinancing, we show that controlling shareholders strategically benchmark the issue prices against prices in periods of underperformance to expropriate minority shareholders through deep discounts. Pre-announcements of a PP, before the issue day when the impact of price discount materializes, are associated with positive cumulative abnormal returns. While the discount incentivizes participants and improves firm value by 3.38%, it leads to a direct tunneling of 5.6% of a firm's value, resulting in a 2.22% value destruction. A controlling shareholder is more likely to tunnel a well performing firm, but he refrains from tunneling if a firm's performance is rather poor. Using the interaction between past performance and a dummy for large shareholder's participation as a plausible instrumental variable for the discount, we find that each percent of price discount causes a 0.67% loss of an issuing firm's market value.

Publication Type: Thesis (Doctoral)
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School
Cass Business School > Finance
Doctoral Theses > Cass Doctoral Theses
URI: https://openaccess.city.ac.uk/id/eprint/23073
[img] Text - Accepted Version
This document is not freely accessible until 31 August 2022 due to copyright restrictions.

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