Relationships, Corporate Governance, and Performance: Evidence from Private Placements of Common Stock
41 Pages Posted: 10 Jul 2007
Date Written: July 23, 2008
Using data from private placement contracts, we analyze relationships between investors and issuers, and their impact on corporate governance and performance. Most investors have a relationship with the issuer pre-placement and many new relationships are formed through the placement agreement. New relationships are largely governance-related (board seats and/or 5% or greater blocks), but also include key business partnerships and/or employment arrangements. We have three main findings. First, new relationships drive the positive stock price response at announcement; placements lacking new relationships are non-events. Second, investors with relationship ties to the issuer are more likely to gain directorships as part of the placement. Third, new relationships are associated with stronger post-placement profitability and stock price performance. Overall, our findings are consistent with private placements creating value when they are associated with increased monitoring and strong governance.
Keywords: private placement, private equity, equity issuance, relationship investing, relationship investor; hierarchy of investors; agency theory; asymmetric information; entrenchment; specific investment; relationship-specific investment, governance, blockholders, ownership concentration
JEL Classification: G39, G32, K22
Suggested Citation: Suggested Citation