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Long-run underperformance following private equity placements: The role of growth opportunities

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  • Chou, De-Wai
  • Gombola, Michael
  • Liu, Feng-Ying
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    Abstract

    Our results show that the post-offering performance of private equity issuers is related to growth opportunities. We find significant long-run underperformance in stock returns following private placements only for firms with high Tobin's q. High-q firms experience not only poor stock price performance but also poor operating performance. Low-q firms, in contrast, do not display significant stock price or operating underperformance. We further examine three potential explanations for this relation: over-investment in assets by managers, investor skewness preference, and over-optimism about earnings prospects. Our results are consistent with the view that investors are overly optimistic about the prospects of high growth firms.

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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 49 (2009)
    Issue (Month): 3 (August)
    Pages: 1113-1128

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    Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:1113-1128

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    Web page: http://www.elsevier.com/locate/inca/620167

    Related research

    Keywords: Private placements Long-run performance Growth opportunities;

    References

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    Cited by:
    1. Cécile Carpentier & Jean-François L’Her & Jean-Marc Suret, 2013. "Private investment in small public entities," Small Business Economics, Springer, vol. 41(1), pages 149-168, June.
    2. Sazali Abidin & Krishna Reddy & Liehui Chen, 2012. "Determinants of ownership structure and performance of seasoned equity offerings: Evidence from Chinese stock markets," International Journal of Managerial Finance, Emerald Group Publishing, vol. 8(4), pages 304-331.
    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.

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