Do Investor Identity and Contract Terms Interact? Evidence from the Wealth Effects of Private Placements

Abstract:     
Financial relationships can alleviate adverse effects of asymmetric information and agency costs on outside stakeholders. We examine how contract terms and investor identity interact to convey the nature of financial relationships. Using equity private placements, we find that contract terms convey information conditional on investor identity. Arms-length investors with board seats associate with wealth effects similar to those of strategic investors, while strategic investors requesting enhanced liquidity elicit effects similar to arms-length relationships. We conclude that investor identity and contractual mechanisms act as substitutes in conveying the nature of the financial relationship.

Number of Pages in PDF File: 52

Keywords: Private investment in public equity, PIPEs, private placement, investor identity, contract terms, financial contracting

JEL Classification: G23, G24, G32, G34

working papers series