Stock Price Dynamic When Growth Options Converted into Assets in Place: Evidence from Private Placements in Taiwan
2 Pages Posted: 16 Feb 2015
Date Written: February 14, 2015
Using a sample of 418 private placements by firms on the Taiwan stock markets, we examine their announcement returns and post-issue performance. Placements are classified into three categories: recapitalization, investment, and general purpose. We find that issuers of private placements tend to be poorly operated and financially constrained. We also document a positive market reaction to all of three categories of placements. Placements in the recapitalization category do not have long-run abnormal returns, suggesting that the benefit from relieving financial constraints is offset by the decrease in expected return when growth options are converted into assets in place. Placements in the investment category are associated with better long-run performance, suggesting that issuers with specific plans to increase investment in capital expenditures or in R&D have profitable investment opportunities. Finally, we find that placements in the general purpose category underperform, suggesting that issuers without specific investment plans tend to opportunistically time the market.
Keywords: Private placements; Intended use of funds; Capital expenditures; Long-run performance
JEL Classification: G14, G30, G32
Suggested Citation: Suggested Citation