Why Do Insiders Sometimes Pay More and Sometimes Pay Less in Private Placements?

The International Journal of Business and Finance Research, Vol. 6, No. 2, pp. 35-52, 2012

18 Pages Posted: 6 Jan 2012

See all articles by Yeh Ching Yi

Yeh Ching Yi

affiliation not provided to SSRN

Tai Ma

National Sun Yat-sen University

Date Written: 2012

Abstract

This paper explores private placement pricing sold to insiders by considering changes in the control power of the largest shareholders in private placement. We use the Banzhaf power index to reflect the largest shareholder’s relative power of influence. The results indicate that, if existing insiders maintain their leading control status, in cases where insiders are the main investors, private placements are issued at deep discounts that benefit themselves. However, in cases where outsiders/new insiders are the main investors, outsiders and new insiders will pay relatively more when existing insiders dominate. Contrarily, if existing insiders fail to retain their leading position and become less powerful after private placement, outsiders and new insiders buy at lower prices. In more than 65% of the sample, the largest shareholders lost their leading control status, and the issuer’s ownership structure becomes more concentrated following private placements. Finally, the findings suggest that motivations of private placement issues have a greater influence on pricing than investor types in private placements.

Keywords: Private placement discount, power index, control right, self-dealing, ownership structure

JEL Classification: G1, G3

Suggested Citation

Yi, Yeh Ching and Ma, Tai, Why Do Insiders Sometimes Pay More and Sometimes Pay Less in Private Placements? (2012). The International Journal of Business and Finance Research, Vol. 6, No. 2, pp. 35-52, 2012, Available at SSRN: https://ssrn.com/abstract=1948805

Yeh Ching Yi (Contact Author)

affiliation not provided to SSRN ( email )

Tai Ma

National Sun Yat-sen University ( email )

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan
886-7-525-2000 ext. 4810 (Phone)
886-7-525-4899 (Fax)

HOME PAGE: http://www.finance.nsysu.edu.tw/teachers/matai/e-index.htm

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