Private placements to owner-managers: Theory and evidence

Description

We present an asymmetric information model to examine private placements issued to owner-managers. Our main conclusion is that allowing private placements to insiders can mitigate, if not eliminate, the underinvestment problem. Our model predicts that announcement-period returns for private placements should be: (1) positive; (2) dependent on regulatory constraints that determine the issue price; (3) positively related to volatility; (4) negatively related to leverage; (5) negatively related to owner-managers’ shareholdings; (6) inversely related to proxies for manipulation; and (7) negatively related to illiquidity. We empirically test the model’s predictions, along with those from the existing literature, using a sample of private placements issued in Indian capital markets during 2001–2009. The results provide evidence that is largely consistent with the model.

Publication Date

1-1-2018

Keywords

Private placement, Preferential allotment, Business groups, Underinvestment

Conference

NSE-NYU Conference on Indian Financial Markets, 10-11 December, 2018, Mumbai

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