Firm Quality and the Placement Price of Private Equity

Abstract

In this article we argue the price per share at which private equity is sold relative to current market price conveys important information to the stock market regarding firm quality. The information content of the placement price may be especially important in markets where there are no specific regulations governing either the placement price or the on-market resale of the new shares. New Zealand's laissez-faire attitude towards market regulations during the later part of the 20th century makes an ideal laboratory to explore this proposition. In particular, there is a strong link between placement price relative to current market price and the announcement reaction to new private equity offerings. Further, the size of the discount to current market price is strongly related to proxies for the quality of the firm's future prospects and risk.

Keywords: Private Equity, Pricing, Firm Quality, Regulation

JEL Classification: G32, G38