Do private placements exacerbate the degree of asset mispricing? A study based on theories of information asymmetry and signaling

Abstract

This paper considers data from China's A-share listed companies in Shanghai and Shenzhen from 2006 to 2021 to investigate how private placements affect asset mispricing. The findings from the empirical study demonstrate that private placements by listed companies substantially impact the level of asset mispricing. This conclusion holds when controlling for potential endogeneity issues. Analyzing the mechanism indicates that private placements elicit irrational investment behavior from investors by delivering positive signals while simultaneously intensifying information asymmetry, exacerbating asset mispricing. Further analysis shows that asset mispricing is more pronounced in non-state-owned firms, firms with lower external audit quality, and firms with high management and shareholder agency costs. This paper's findings provide theoretical support for regulators to formulate a reasonable policy on private placements and provide useful guidance for companies to use private placements as a financing tool. Moreover, the conclusions offer empirical evidence for developing policies to temper management conduct and strengthen the well-being of financial markets.