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Market Discounts and Shareholder Gains for Placing Equity Privately

Authors

  • MICHAEL HERTZEL,

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    • Department of Finance, College of Business, Arizona State University. We thank Hank Bessembinder, Bart Broadman, John Byrd, Kalok Chan, Saeyoung Chang, Jack Cooney, Espen Eckbo, Paul Healy, Wayne Mikkelson, Megan Partch, George Racette, Jim Schallheim, Dennis Sheehan, Janet Smith, René Stulz, Michael Vetsuypens, Karen Wruck, two referees and seminar participants at Arizona State University, the University of Arizona, and the University of Oregon for helpful comments on earlier drafts. The paper, previously titled “Market responses to equity private placement announcements and the pricing of privately placed equity,” was presented at the American Finance Association Annual meeting, December 1990. Financial support from the Center for Financial System Research at Arizona State University is acknowledged.

  • RICHARD L. SMITH

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    • Department of Finance, College of Business, Arizona State University. We thank Hank Bessembinder, Bart Broadman, John Byrd, Kalok Chan, Saeyoung Chang, Jack Cooney, Espen Eckbo, Paul Healy, Wayne Mikkelson, Megan Partch, George Racette, Jim Schallheim, Dennis Sheehan, Janet Smith, René Stulz, Michael Vetsuypens, Karen Wruck, two referees and seminar participants at Arizona State University, the University of Arizona, and the University of Oregon for helpful comments on earlier drafts. The paper, previously titled “Market responses to equity private placement announcements and the pricing of privately placed equity,” was presented at the American Finance Association Annual meeting, December 1990. Financial support from the Center for Financial System Research at Arizona State University is acknowledged.


ABSTRACT

Despite selling at substantial discounts, private placements of equity are associated with positive abnormal returns. We find evidence that discounts reflect information costs borne by private investors and abnormal returns reflect favorable information about firm value. Results are consistent with the role of private placements as a solution to the Myers and Majluf underinvestment problem and with the use of private placements to signal undervaluation. We also find some evidence of anticipated monitoring benefits from private sales of equity. For the smaller firms that comprise our sample, information effects appear to be relatively more important than ownership effects.

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