Private Placements, Regulatory Restrictions and Firm Value: Theory and Evidence from the Indian Market

67 Pages Posted: 26 Mar 2010 Last revised: 8 Aug 2012

See all articles by Marti G. Subrahmanyam

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Vijaya B. Marisetty

RMIT University; Financial Research Network (FIRN)

V. Ravi Anshuman

Indian Institute of Management Bangalore

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2010

Abstract

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.

Keywords: Private Placement, Preferential Allotment, Business Groups, Underinvestment

JEL Classification: G18

Suggested Citation

Subrahmanyam, Marti G. and Marisetty, Vijaya B. and Anshuman, V. Ravi, Private Placements, Regulatory Restrictions and Firm Value: Theory and Evidence from the Indian Market (March 15, 2010). AFA 2011 Denver Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1570868 or http://dx.doi.org/10.2139/ssrn.1570868

Marti G. Subrahmanyam (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Vijaya B. Marisetty

RMIT University ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

V. Ravi Anshuman

Indian Institute of Management Bangalore ( email )

Bannerghatta Rd.
Department of Finance
Bangalore, Karnataka

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