The Impact of Mispricing and Asymmetric Information on the Price Discount of Private Placements of Common Stock


  • We would like to thank Bonnie Van Ness (the editor), two anonymous reviewers, and Edward Harris for valuable comments and suggestions. We are also grateful for the support of the ECU summer research stipend.

College of Business, Department of Finance, East Carolina University, Greenville, NC 28590; Phone/Fax: (252) 328-6636; E-mail:


The price discount on privately placed stock is large and can vary substantially among firms. While earlier studies attribute price discounts on privately placed stock to illiquidity and costs of gathering information, we offer a more complete explanation. We find that firms exhibiting higher overvaluation have significantly larger price discounts in private stock sales. We also find that higher levels of asymmetric information about the issuing firm and about the stock market environment at the time of the private placement cause more pronounced discounts in the offer price. Our analysis also shows that post-issue abnormal returns following private placements are higher when discounts are less pronounced.