Is the Largest Shareholder as Underwriter Better Able to Certify a Seasoned Equity Issue?

Abstract

The largest shareholder of an issuing firm in Hong Kong can be the underwriter for rights offers and open offers. We hypothesize that being an underwriter the largest shareholder who possesses more information is better than investment banks in certifying firm value and we find the evidence to support this hypothesis. The hypothesis is further generalized for the seasoned equity offerings purely underwritten by investment banks and our result shows that the investment banks of non-switching firms can better help reducing price declines than the investment banks of switching firms. The largest shareholders are more likely to be the underwriter for rights-preserving offers if the issuers have higher market-to-book ratio, higher dividend yields, higher ownership concentration, lower price discounts, higher precommitments for the new issues and lower level of information asymmetry. The rights-preserving offers underwritten by the largest shareholders may signal the undervaluation of the existing assets of issuing firms and safeguard the private benefits of the largest shareholders. These findings suggest that the choice of underwriter is informative of issue quality.

Keywords: Rights-preserving offers, Information asymmetry, Underwriter certification, subscription precommitments

JEL Classification: G14, G24