Ownership Concentration, Asymmetric Information, and the Positive Announcement Effect of New Equity Placements

Abstract

The literature has documented a positive announcement effect for privately placed seasoned equity issues. The two widely cited explanations are Wruck's (1989) ownership concentration changes hypothesis and Hertzel and Smith's (1993) asymmetric information mitigation hypothesis. However, these two hypotheses are premised on a debatable idea that private investors play an active, value-enhancing role through new equity purchases (as challenged by Barclay, Holderness and Sheehan 2001). Further questioning the validity of these hypotheses, this paper shows that both the hypotheses are based on results obtained from using an unusual measure of announcement return that biases the related tests in favor of these hypotheses. Using a standard return measure and a unique Hong Kong data set that can isolate the factors that underlie the two hypotheses, we find no evidence for these two hypotheses. A more interesting and important finding is that positive announcement returns of equity placements (including some non-private placements) reflect an endogenously determined information effect, consistent with a generalized Myers-Majluf model.

Keywords: Equity Placement, Announcement Effect, Asymmetric Information, Investment Opportunities, Ownership Structure

JEL Classification: G14, G32