Private Placements and Managerial Entrenchment

Abstract

We re-examine old evidence and provide new evidence on private placements of large-percentage blocks of stock. Our goal is to judge whether the prevailing hypotheses of monitoring and certification explain most private placements. Examining new evidence on events following the private placement and using a much larger sample than previous studies, our findings suggests that private placements are often made to passive investors, thereby helping management solidify their control of the firm. Although monitoring and certification may motivate some private placements, the evidence with respect to placement discounts, stock-price reactions, the post-placement activities of the purchasers, and a comparison with arms-length trades of large blocks of stock favors managerial entrenchment as the explanation for many private placements.

Keywords: G32, G34

JEL Classification: Private Placement, Entrenchment