The link between seasoned equity offering (SEO) filings and firms reaching new stock price highs in 2015 and 2016 shows a narrower fluctuation range compared with the 2005–2007 period. This suggests that market behaviour during those years was more stable, possibly because a strong bull market and widespread investor optimism marked 2015. During this time, fund accounts and securities firms backed by bank capital became major players in the private placement market, fuelling a rise in new equity issuances. To better understand this relationship, the researchers ran time-series regressions comparing the number of companies reaching new highs with the total number of share issuances.

This work was led by Yu Xia from Sichuan Tourism University and Shuxin Guo from Southwest Jiaotong University. Their study, published in China Finance Review International under the title “Historical High Prices and Seasoned Equity Offerings: Evidence from China”, offers an in-depth look at how firms in China time their share issuances in relation to past stock price peaks. The research sheds light on behavioural aspects of financial decision-making, showing that market timing is not always a product of rational analysis but can also be driven by psychological anchors.

The study introduces a unique metric, the anchoring-high-price ratio, that measures how close a stock’s current price is to its previous high. This allows the researchers to explore whether company managers are influenced by past price levels when deciding to issue additional shares. By focusing on this ratio, the study moves beyond traditional market efficiency theories and highlights how behavioural biases can influence corporate financing strategies, particularly in emerging markets like China.

Using data from China’s A-share market between 1998 and 2020, the authors combine monthly and annual analyses with a range of statistical tools, including probit regressions and robustness tests. They control for key firm characteristics, such as leverage, profitability, size, and market-to-book ratio, to ensure their findings reflect genuine behavioural effects rather than other financial factors. This comprehensive approach strengthens the evidence for the anchoring effect in Chinese equity markets.

The findings reveal that firms are far more likely to issue new shares when stock prices approach historical highs. However, unlike the pattern often observed in the United States, the Chinese market tends to react negatively to these announcements, leading to deeper discounting of offerings and weaker long-term performance. The research also shows that firms issuing shares near price peaks tend to lower their leverage ratios over time, suggesting that such equity financing decisions can reshape capital structures in lasting ways.

Overall, the study offers valuable insights into how behavioural factors influence corporate finance in China’s dynamic market. For investors, tracking how close share prices are to their historical highs can offer early signals of potential equity issuances. For managers, it serves as a reminder that psychological biases, such as anchoring, can lead to costly timing mistakes. And for regulators, it highlights the need to account for behavioural tendencies when shaping policies to improve transparency, protect investors, and enhance market stability.

More information: Yu Xia et al, Historical high prices and seasoned equity offerings: evidence from China, China Finance Review International. DOI: 10.1108/CFRI-10-2023-0259

Journal information: China Finance Review International Provided by Shanghai Jiao Tong University Journal Center