Role of Intermediation when Equity is placed with Select Investors

Abstract

We analyze the role of placement agents in non-underwritten equity deals placed with a limited investor base. We posit that stronger, better firms can place their unregistered shares directly with investors; whereas issuers’ reliance on agents to place relatively more liquid pre-registered shares is an indication of weakness. Indeed, direct placements of unregistered shares evoke a significantly positive response, while intermediated, best-effort deals of pre-registered shares are met with a significantly negative response. Drawing upon these insights, we create a new reputation measure for placement agents which, unlike traditional reputation measures, is consistently and positively associated with deal-announcement wealth effects.

Keywords: Financial Intermediaries; Placement Agents; PIPEs; Non-underwritten deals; Unregistered and Pre-Registered shares

JEL Classification: G24, G23, G32, G38, G18