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Private Placements of Equity and Firm Value: Value Enhancing or Value Destroying?

Published online by Cambridge University Press:  27 July 2020

Jun-Koo Kang Open the ORCID record for Jun-Koo Kang [Opens in a new window]  and
James L. Park
Jun-Koo Kang
Affiliation:
Nanyang Technological University, Nanyang Business School [email protected]
James L. Park*
Affiliation:
Korea University Business School
*
[email protected] (corresponding author)
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Abstract

This paper reassesses two conflicting hypotheses on the valuation impacts of private placements of equity (PPEs), the monitoring/certification hypothesis and the managerial entrenchment hypothesis, by focusing on the shareholder approval, active buyer, and premium pricing features of PPEs. We find that PPEs with these features have significant positive announcement returns and insignificant mean long-run returns, while the corresponding announcement and long-run returns for PPEs without such features are significantly negative. Firms with value-enhancing PPE features are better governed and use proceeds more efficiently. Thus, the heterogeneous nature of PPEs helps reconcile the puzzling return patterns and conflicting hypotheses regarding PPEs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 2072 - 2102
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

This paper is based on Park’s second dissertation chapter at the Wharton Business School and was previously circulated under the title “Equity Issuance, Distress, and Agency Problems: The 20% Rule for Privately Issued Equity.” We are grateful for helpful comments from an anonymous referee, Ron Giammarino, João Gomes, Jarrad Harford (the editor), Cliff Holderness, Craig MacKinlay, Michael Roberts, Luke Taylor, Amir Yaron, and seminar participants at Korea Advanced Institute of Science and Technology (KAIST), Korea University, Nanyang Technological University, Seoul National University, and Yonsei University. We are also grateful to the participants at the 2011 Pacific Northwest Finance Conference, the 2011 Western Finance Association Annual Conference, and the 2014 American Finance Association Annual Meeting. Park acknowledges financial support from the Asian Institute of Corporate Governance (AICG) and Korea University Business School Research Grant. All errors are our own.

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