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Relationships, Corporate Governance, and Performance: Evidence from Private Placements of Common Stock

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  • Wruck, Karen H.

    (Ohio State U)

  • Wu, YiLin

    (National Tsing Hua University)

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    Abstract

    Utilizing a large sample with unique data gathered directly from private placement contracts, we address two important questions that remain unresolved in the literature. First, what types of relationships connect private placement investors and issuers, and how do these relationships affect issuer performance, deal structure and corporate governance? Second, do relationships between issuers and investors, or a lack thereof, shed light on the performance "puzzle" associated with private placements? Our primary finding is a strong, positive association between new relationships formed around the time of a placement and issuer performance at announcement and post-placement. The vast majority of new relationships are governance-related, so our findings are consistent with increased monitoring and/or stronger governance creating value for investors. We also find that relationship investors are more likely to gain governance influence than other investors. Issuers in "new economy" industries and with high specific risk grant investors more governance influence than other issuers, suggesting that access to governance is especially valuable when information asymmetries and/or specific investments are important.

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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2007/2007-18.pdf
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    Bibliographic Info

    Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2007-18.

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    Date of creation: May 2008
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    Handle: RePEc:ecl:ohidic:2007-18

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