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

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