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Private Placements by Small Public Entities: Canadian Experience

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  • Cécile Carpentier

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  • Jean-Marc Suret

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    Abstract

    In Canada, most of the private placements are offered by small and unprofitable entrepreneurial ventures -- for which the asymmetry of information and adverse selection problems are particularly acute. Private placements are a very important source of equity for these emerging businesses. In contrast with the public offering process, placements of shares are made in the exempt market with accredited or sophisticated investors. It is assumed that these investors would be knowledgeable enough to protect their own interests. The aim of this paper is to analyze the extent to which such private placements can be considered “fair”, i.e. if they provide investors with a fair rate of return and if accredited investors are indeed able to price these placements correctly in a context of large asymmetry of information. The answer is clearly negative. Au Canada, la majorité des placements privés sont émis par de petites entreprises en émergence, non rentables. Les problèmes d’asymétrie de l’information et d’anti-sélection sont particulièrement sévères. Les placements privés sont toutefois une source de financement très importante pour ces entreprises. Contrairement aux offres publiques, les placements privés sont émis dans le cadre du régime d’exemption, auprès d’investisseurs agréés dont on considère qu’ils ont les connaissances requises pour veiller à leurs intérêts financiers. L’objectif de l’étude est de déterminer dans quelle mesure les placements privés procurent un taux de rendement équitable aux investisseurs et si les investisseurs agréés sont en mesure d’apprécier correctement la valeur de ce type d’investissement. La réponse est négative.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 2009s-12.

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    Date of creation: 01 Apr 2009
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    Handle: RePEc:cir:cirwor:2009s-12

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    Related research

    Keywords: Private placements; SME; securities regulation; public policies; financing; Placement privé; petites entreprises; réglementation des valeurs mobilières; politiques publiques; financement;

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    1. Hamish D. Anderson, 2006. "Discounted Private Placements in New Zealand: Exploitation or Fair Compensation?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 533-548.
    2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    3. David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2004. "PIPE Dreams? The Performance of Companies Issuing Equity Privately," NBER Working Papers 11011, National Bureau of Economic Research, Inc.
    4. Dalia Marciukaityte & Samuel H. Szewczyk & Raj Varma, 2005. "Investor Overoptimism And Private Equity Placements," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 28(4), pages 591-608.
    5. Michael Hertzel & Michael Lemmon & James S. Linck & Lynn Rees, 2002. "Long-Run Performance following Private Placements of Equity," Journal of Finance, American Finance Association, vol. 57(6), pages 2595-2617, December.
    6. Krishnamurthy, Srinivasan & Spindt, Paul & Subramaniam, Venkat & Woidtke, Tracie, 2005. "Does investor identity matter in equity issues? Evidence from private placements," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 210-238, April.
    7. Hauser, Shmuel & Kraizberg, Elli & Dahan, Ruth, 2003. "Price behavior and insider trading around seasoned equity offerings: the case of majority-owned firms," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 183-199, March.
    8. Michael J. Gombola & Hei Wai Lee & Feng-Ying Liu, 1999. "Further Evidence on Insider Selling Prior to Seasoned Equity Offering Announcements: The Role of Growth Opportunities," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(5&6), pages 621-649.
    9. Eckbo, B. Espen & Masulis, Ronald W. & Norli, Oyvind, 2000. "Seasoned public offerings: resolution of the 'new issues puzzle'," Journal of Financial Economics, Elsevier, vol. 56(2), pages 251-291, May.
    10. Cécile Carpentier & Jean-François L’Her & Jean-Marc Suret, 2008. "Does securities regulation constrain small business finance? An empirical analysis," Small Business Economics, Springer, vol. 31(4), pages 363-377, December.
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