Market Discounts and Shareholder Gains for Placing Equity Privately

Market Discounts and Shareholder Gains for Placing Equity Privately 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Market Discounts and Shareholder Gains for Placing Equity Privately

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Publisher
Wiley
Copyright
1993 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1993.tb04723.x
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

The Journal of FinanceWiley

Published: Jun 1, 1993

References

  • The valuation effects of private placements of convertible debt
    Fields, Fields; Mais, Mais
  • Information asymmetries, financial structure, and financial intermediation
    Leland, Leland; Pyle, Pyle
  • Equity issues and stock price dynamics
    Lucas, Lucas; McDonald, McDonald
  • Dividend policy under asymmetric information
    Miller, Miller; Rock, Rock

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