Can major shareholders and institutional investors affect issue price discounts in private placement of SEO?

Abstract

China's private equity issuance has continued to evolve since 2006. The private placement issuance market was formed in a large scale until December 2017. Private placement issuance is different from the public offering and supervision and control are important research tasks in the private equity issuance because of its closed attribute. There are mainly two reasons that affect the discount rate during the private placement issuance process. The first is information asymmetry and the second is tunneling effect of a major shareholder. This study examines the effect of large shareholder and institutional investor participation on the discount rate of private placement issuance, reveals that major shareholders have a motive for tunneling while issuing private placement shares and infringe on the interests of small shareholders, And institutional investors take advantage of their own information gathering, analysis and expertise which is used to reduce information asymmetry and inhibit major shareholder's tunneling motivation. In this study, institutional investors were identified as active investors and passive investors. Active institutional investors seem to have increased major shareholder tunnels for their own interests because their speculative nature. This may happen during the issuance of private placement securities, which means that the securities supervision department will enhance the supervision. Therefore, it would be essential to improve the market system and regulate the behavior of large shareholders and institutional investors.