Private Placements to Owner-Managers: Theory and Evidence

Posted: 14 Jun 2016

See all articles by Vijaya B. Marisetty

Vijaya B. Marisetty

RMIT University; Financial Research Network (FIRN)

Date Written: 2015

Abstract

We present an asymmetric information model to examine private placements of equity. Our main conclusion is that allowing private placements to owner-managers 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 insider ownership; (5) negatively related to illiquidity; and (6) inversely related to proxies of manipulation. Our model also predicts that: (7) announcements effects for private placements to private equity investors should be lower than that those of private placements to owner- managers. We empirically test our model's predictions, along with others from the literature, on a sample of private placements issued in the Indian capital markets during 2001-2009 and report empirical evidence largely consistent with the model.

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

JEL Classification: G18

Suggested Citation

Marisetty, Vijaya B., Private Placements to Owner-Managers: Theory and Evidence (2015). First Annual Volatility Institute at NYU Shanghai (VINS) Conference - 2015; FIRN Research Paper No. 2795658. Available at SSRN: https://ssrn.com/abstract=2795658

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

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