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

  • Wruck, Karen H.
  • Wu, YiLin
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    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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    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
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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