Private Placements, Regulatory Restrictions and Firm Value: Theory and Evidence from the Indian Market
Marti G. Subrahmanyam
New York University - Stern School of Business
Vijaya B. Marisetty
RMIT University; Financial Research Network (FIRN)
V. Ravi Anshuman
Indian Institute of Management Bangalore
March 15, 2010
AFA 2011 Denver Meetings Paper
We present an extension of the Myers and Majluf (1984) model to examine private placements issued to owner-managers. Our main conclusion is that allowing private placements to insiders can mitigate, if not eliminate, the underinvestment problem. Our model predicts that announcement period returns for private placements should be: (1) positive; (2) dependent on regulatory constraints that determine the issue price; (3) positively related to volatility; (4) negatively related to leverage; (5) negatively related to owner-managers' shareholdings (6) related to proxies of manipulation; and (7) negatively related to illiquidity. We empirically test the model's predictions on a sample of 164 preferential allotments (private placements) issued in the Indian capital markets during 2001-2009 and report empirical evidence largely consistent with the model. In addition to the predictions of our model, we also find that announcement period returns of: (8) firms affiliated to business groups are not lower than those of stand-alone firms and (9) private placements made to (active) private equity investors are not higher than those made to (passive) banks or financial institutions.
Number of Pages in PDF File: 67
Keywords: Private Placement, Preferential Allotment, Business Groups, Underinvestment
JEL Classification: G18working papers series
Date posted: March 26, 2010 ; Last revised: August 8, 2012
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