Long-Run Performance following Private Placements of Equity


  • Michael Hertzel,

  • Michael Lemmon,

  • James S. Linck,

  • Lynn Rees

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    • Hertzel is at Arizona State University, Lemmon is at the University of Utah, Linck is at the University of Georgia, and Rees is at Texas A&M University. We thank Kent Daniel, Steve Foerster, Ludger Hentschel, Sherry Jarrell, Srini Kamma, Ed Kane, Ajay Khorana, S. P. Kothari, Wayne Mikkelson, Jim Nelson, Cliff Smith, two anonymous referees, Rick Green and René Stulz (the editors), and seminar participants at the American Graduate School of International Management, the University of Arizona, Arizona State University, Georgia Tech, the University of Miami, the University of Rochester, Texas A&M University, the University of Western Ontario, the 1997 Financial Management Association Meetings, and the 1998 Southern Finance Association meetings for helpful comments. Greg Durham, Lalitha Naveen, and Jerry Chen provided valuable research assistance. Hertzel acknowledges financial support from the Dean's Council of 100 Faculty Summer Grant Program and the Jack B. Furst Private Equity Research Program. Any errors or omissions are the responsibility of the authors.


Public firms that place equity privately experience positive announcements effects, with negative post-announcement stock-price performance. This finding is inconsistent with the underreaction hypothesis. Instead, it suggests that investors are overoptimistic about the prospects of firms issuing equity, regardless of the method of issuance. Further, in contrast to public offerings, private issues follow periods of relatively poor operating performance. Thus, investor overoptimism at the time of private issues is not due to the behavioral tendency to overweight recent experience at the expense of long-term averages.