Clear and Specific Evidence in Explaining How Motivation Influences Private Placements of Equity Decisions in Chinese Listed Companies

In the research on Private Placements of Equity in China, we study Chinese firms issuing PPEs and their behaviors throughout the process. PPE is the most popular equity financing practice in China, and there is need to examine how motivation determines the decisions of the firms to issue PPEs. We use two theories (the trade-off theory and the agency theory) to explain the behaviors and decision of PPE-issuing firms to contact PPEs. Results show that Chinese listed companies conduct PPE if their leverage level in their capital structure is higher compared to the optimal level of debt. The study supports the "monitoring effect" hypothesis that suggests that PPEs are issued to large investors who can actively oversee/supervise management and efficient allocation of the resource. The study will contribute in striking contrast to the current literature that ignores the impact of ownership structure surrounding private placements on the firms' decisions to conduct PPEs.