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INVESTOR OVEROPTIMISM AND PRIVATE EQUITY PLACEMENTS

Authors


  • We gratefully acknowledge helpful comments and suggestions from James Linck (reviewer), Dwight Anderson, Tom Bates, Terry Campbell, John Easterwood, Michael Gombola, Jeff Harris, Eric Higgins, and Stuart Gillan. We also thank Andrew Moore for excellent research assistance and Brenda Sanderson for help in preparing the manuscript. All remaining errors are our own.

Abstract

We reexamine investor tendency to overweight recent experiences when predicting future performance of firms by examining a sample of firms making private equity placements. Our findings are consistent with the projection argument that investors use the recent experiences of other firms to predict the success of placing firms. Specifically, we find that the placements preceded by a larger number of recently very successful firms are associated with the significantly more favorable market reaction to the placement announcement and significantly poorer post-placement stock price performance.

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