What Determines the Discount for Private Equity Offerings - Ownership or Control Rights?

Abstract:     
This paper examines the relationship between private benefits and the discount of private equity offerings. Measuring private benefits in terms of both control rights and cash flow rights for insiders and outsiders, we find that control right is the dominant factor in private placement discounts. Private benefits are the most important factor in pricing private equity offerings, explaining 17.7% of private placement discount, and 16% of which comes from control right, only 2% from ownership. Furthermore, insiders are willing to pay more for private offerings than outsiders especially in high ownership concentration (greater than 25%) case. Finally, we find that contrary to the literature in corporate governance, the level of control seems to mean more to insiders than the deviation between control right and ownership in private equity offerings.

Number of Pages in PDF File: 27

Keywords: Private placement, discount, private benefits.

JEL Classification: G0, G3

working papers series