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

67 Pages Posted: 14 Nov 2010 Last revised: 8 Aug 2012

See all articles by V. Ravi Anshuman

V. Ravi Anshuman

Indian Institute of Management Bangalore

Vijaya B. Marisetty

RMIT University; Financial Research Network (FIRN)

Marti G. Subrahmanyam

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

Multiple version iconThere are 3 versions of this paper

Date Written: November 12, 2010

Abstract

We present an asymmetric information 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.

Suggested Citation

Anshuman, V. Ravi and Marisetty, Vijaya B. and Subrahmanyam, Marti G., Private Placements, Regulatory Restrictions and Firm Value: Theory and Evidence from the Indian Market (November 12, 2010). Available at SSRN: https://ssrn.com/abstract=1708321 or http://dx.doi.org/10.2139/ssrn.1708321

V. Ravi Anshuman

Indian Institute of Management Bangalore ( email )

Bannerghatta Rd.
Department of Finance
Bangalore, Karnataka

Vijaya B. Marisetty (Contact Author)

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

Marti G. Subrahmanyam

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

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