Relationships, Corporate Governance, and Performance: Evidence from Private Placements of Common Stock

Abstract

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