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Relationships, corporate governance, and performance: Evidence from private placements of common stock

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  • Wruck, Karen H.
  • Wu, YiLin
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 15 (2009)
    Issue (Month): 1 (February)
    Pages: 30-47

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    Handle: RePEc:eee:corfin:v:15:y:2009:i:1:p:30-47

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Private placement Private equity Equity issuance Relationship investing Relationship investor Agency theory Asymmetric information Entrenchment Specific investment Relationship-specific investment; governance; blockholders Ownership concentration;

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    Cited by:
    1. Floros, Ioannis V. & Sapp, Travis R.A., 2012. "Why do firms issue private equity repeatedly? On the motives and information content of multiple PIPE offerings," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3469-3481.
    2. Lee, Chin-Chong & Poon, Wai-Ching & Sinnakkannu, Jothee, 2014. "Why are rights offers in Hong Kong so different?," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 176-197.
    3. Liang, Hsiao-Chen & Jang, Woan-Yuh, 2013. "Information asymmetry and monitoring in equity private placements," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 460-475.
    4. Rose, Morgan J., 2009. "Heterogeneous impacts of staggered boards by ownership concentration," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 113-128, February.

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