Investor Equity Private Placement Value Misconceptions: Real and Imagined Operating Flow Determinants

Abstract

We examine the equity private placement pre- and post-announcement relationship between stock market and operating performance, and how this is impacted by the issuing company’s characteristics. Outside public investors mainly misconstrue the information available at the announcement date, contributing to an unsound announcement price overvaluation. Almost all characteristics related to announcement date abnormal stock returns differ from those related to post-issue stock and operating performance. Results are consistent with outside investors being over-optimistic, using unsound naïve valuation models prior to and at the announcement of equity private placements, and losing wealth thereafter. Alternatively, private investors’ decision to invest in private placements is rational, results in reasonable returns on their investments, and is consistent with providing needed resources for the companies so that they can maintain competitive operating performance levels.

TOPICS: Private equity, performance measurement, analysis of individual factors/risk premia, statistical methods