The choice of flotation methods: Evidence from Chinese seasoned equity offerings

Using a comprehensive sample of Chinese seasoned equity offerings, we compare three major equity flotation methods employed by listed firms in China: rights issues, public offerings, and private placements. The dominant flotation method changed significantly around 2005. We examine the valuation effects of the three methods before and after 2005 and identify the determinants affecting the choice of flotation method. Our results support the information asymmetry hypothesis in that firms with high levels of information asymmetry tend to choose private placements and avoid either public offerings or rights issues. Ownership structure does not seem to be a key factor in determining the selection of flotation method. Profitability requirements of refinancing prevent many listed firms from raising additional capital externally. The removal of profitability requirements for private placements in 2006 boosts the popularity of private placements and explains the shift from rights issues to private placements to some extent.