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

41 Pages Posted: 10 Jul 2007

See all articles by Karen H. Wruck

Karen H. Wruck

Ohio State University - Fisher College of Business, Department of Finance

YiLin Wu

National Tsing Hua University - Department of Quantitative Finance

Date Written: July 23, 2008

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

Suggested Citation

Wruck, Karen H. and Wu, Yi-Lin, Relationships, Corporate Governance, and Performance: Evidence from Private Placements of Common Stock (July 23, 2008). Charles A. Dice Center Working Paper No. 2007-18; Fisher College of Business Working Paper No. 2008-03-019; Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=998530 or http://dx.doi.org/10.2139/ssrn.998530

Karen H. Wruck (Contact Author)

Ohio State University - Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4330 (Phone)
614-292-2418 (Fax)

HOME PAGE: http://https://fisher.osu.edu/people/wruck.1

Yi-Lin Wu

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

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