Revealing the Alignment Effect of Ownership Concentration in a Closely Held Market : Evidence from the Choice of Seasoned Equity Flotation Method

Opportunities for controlling shareholders to expropriate from minority shareholders are largely insider information. These opportunities, and hence private benefits of control, can vary substantially across firms even within the same legal environment. As a result, this unobserved firm heterogeneity confounds the alignment effect of ownership concentration in reducing private benefits. To mitigate this firm heterogeneity, we examine the valuation shocks of new equity issuing decisions (which can reveal the true private benefits) in relation to the level of controlling ownership. We find that in Hong Kong, rights offers signal large private benefits, and control-diluting new issues signal small private benefits, consistent with a separating equilibrium. More interestingly, we find that while observed controlling ownership cannot predict the flotation method choice, the SEO announcement returns are conditionally and significantly related to the level of controlling ownership (with a negative slope for rights issuers and a positive slope for new issuers). The conditional valuation shock patterns suggest a meaningful tradeoff between the incentives for controlling shareholders to benefit the minority shareholders, and the opportunities to expropriate from them