Market Discounts and Shareholder Gains for Placing Equity Privately

MICHAEL HERTZEL, RICHARD L. SMITH

Research output: Contribution to journalArticle

303 Scopus citations

Abstract

Despite selling at substantial discounts, private placements of equity are associated with positive abnormal returns. We find evidence that discounts reflect information costs borne by private investors and abnormal returns reflect favorable information about firm value. Results are consistent with the role of private placements as a solution to the Myers and Majluf underinvestment problem and with the use of private placements to signal undervaluation. We also find some evidence of anticipated monitoring benefits from private sales of equity. For the smaller firms that comprise our sample, information effects appear to be relatively more important than ownership effects. 1993 The American Finance Association

Original languageEnglish (US)
Pages (from-to)459-485
Number of pages27
JournalThe Journal of Finance
Volume48
Issue number2
DOIs
StatePublished - Jun 1993
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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