Private placements and wealth constraints of owner-managers

Description

We present an asymmetric information model of private placements of equity to owner-managers and institutional investors. The investment-financing decision depends on the interaction between asymmetric information held by owner-managers and their wealth constraints. Our model shows that such private placements can mitigate, if not entirely eliminate, the underinvestment problem. Using a sample of 1064 preferential allotments issued in the Indian capital markets during 2001-2017, we find that announcement period returns are (1) positive, (2) higher for pure owner-manager preferential allotments, (3) unrelated to pre-announcement insider ownership, (4) negatively related to market capitalization, (5) negatively related to volatility of returns and (6) dependent on regulatory constraints that determine the issue price.

Publication Date

1-1-2019

Publisher

New York University, Stern School of Business

Keywords

Private placement, Preferential allotment, Under investment

Source Link URL

https://www.stern.nyu.edu/sites/default/files/assets/documents/2018_Anshuman_Panchapagesan_Subrahmanyam_Private%20Placements_Working%20Paper_Dec%202019.pdf

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