Does Firms’ Equity Financing Benefit Debtholders? Evidence from Private Placements of Equity

67 Pages Posted: 18 May 2021 Last revised: 31 May 2022

See all articles by Jun-Koo Kang

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Jee Youn Koh

Nanyang Business School, Nanyang Technological University

James Park

Korea University Business School (KUBS)

Date Written: May 27, 2022

Abstract

We examine how private placements of equity (PPEs) affect debtholder wealth. We find that banks charge higher loan spreads, require more collateral, and impose stricter covenants for PPE firms than for non-PPE firms. The results are more pronounced when PPEs do not carry any issuance features that allow investors to perform value-enhancing monitoring/certification roles and hold when using a two-step treatment effects model with self-selection adjustment. Firms without issuance features also overinvest, and their PPE and post-placement M&A announcements are greeted more negatively by bond and stock markets. Thus, PPEs adversely affect debtholders mainly due to issuers’ managerial entrenchment problems.

Keywords: Private placements of equity, Debtholder wealth, Loan spread, Collateral, Covenant, Managerial entrenchment, PPE issuance feature

JEL Classification: G14, G21, G32, G34, M41

Suggested Citation

Kang, Jun-Koo and Koh, Jee Youn and Park, James, Does Firms’ Equity Financing Benefit Debtholders? Evidence from Private Placements of Equity (May 27, 2022). Nanyang Business School Research Paper No. 21-15, Available at SSRN: https://ssrn.com/abstract=3846717 or http://dx.doi.org/10.2139/ssrn.3846717

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Jee Youn Koh (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

James Park

Korea University Business School (KUBS) ( email )

145 Anam-ro Seongbuk-gu
Seoul, 136-701

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