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Does shareholder coordination matter? Evidence from private placements

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  • Chakraborty, Indraneel
  • Gantchev, Nickolay

Abstract

We propose a new role for private investments in public equity (PIPEs) as a mechanism to reduce coordination frictions among existing equity holders. We establish a causal link between the coordination ability of incumbent shareholders and PIPE issuance. This result obtains even after controlling for alternative explanations such as information asymmetry and access to public markets. Improved equity coordination following a private placement leads to favorable debt renegotiations within one year of issuance. Mitigating coordination frictions among shareholders ultimately decreases the odds of firm default in half.

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  • Chakraborty, Indraneel & Gantchev, Nickolay, 2013. "Does shareholder coordination matter? Evidence from private placements," Journal of Financial Economics, Elsevier, vol. 108(1), pages 213-230.
    • Handle: RePEc:eee:jfinec:v:108:y:2013:i:1:p:213-230
    DOI: 10.1016/j.jfineco.2012.10.001
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    3. Kai-Shi Chuang, 2020. "Private placements, market discounts and firm performance: the perspective of corporate life cycle analysis," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 541-564, February.
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    6. Lamont K. Black & Ioannis Floros & Rajdeep Sengupta, 2016. "Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014," Research Working Paper RWP 16-5, Federal Reserve Bank of Kansas City.
    7. Hsu, Ching-Yu & Chen, Sheng-Syan & Huang, Chia-Wei, 2021. "Board independence and PIPE offerings," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 478-500.
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    9. Suichen Xu & Janice How & Peter Verhoeven & Tom Smith, 2017. "Corporate governance and private placement issuance in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(3), pages 907-933, September.
    10. Laeven, Luc & Götz, Martin & Levine, Ross, 2020. "Do Bank Insiders Impede Equity Issuances?," CEPR Discussion Papers 14913, C.E.P.R. Discussion Papers.
    11. Lim, Jongha & Schwert, Michael & Weisbach, Michael S., 2021. "The economics of PIPEs," Journal of Financial Intermediation, Elsevier, vol. 45(C).
    12. Ye, Zhiqiang & Zhang, Shunming & Zheng, Jiefei, 2023. "The peer effects of PIPEs," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 156-172.
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    14. Ben-Nasr, Hamdi & Boubaker, Sabri & Rouatbi, Wael, 2015. "Ownership structure, control contestability, and corporate debt maturity," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 265-285.
    15. Paul P. Momtaz, 2023. "The economics of PIPEs, revisited," Small Business Economics, Springer, vol. 60(1), pages 59-83, January.
    16. Chen, Linda H. & Dyl, Edward A. & Jiang, George J. & Juneja, Januj A., 2015. "Risk, illiquidity or marketability: What matters for the discounts on private equity placements?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 41-50.
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    18. Rongli Yuan & Yadong Han & Zhanliao Chen, 2023. "Multiple Large Shareholders and Financial Reporting Quality: Evidence from China," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 197-229, March.
    19. Chen, Sheng-Syan & Hsu, Ching-Yu & Huang, Chia-Wei, 2016. "The white squire defense: Evidence from private investments in public equity," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 16-35.
    20. Francis, Bill & Hasan, Iftekhar & Shen, Yinjie (Victor) & Ye, Pengfei, 2021. "Stock price fragility and the cost of bank loans," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 118-135.
    21. Lee, Chien-Chiang & Wang, Chih-Wei & Hsieh, Hsin-Yi & Chen, Wen-Ling, 2023. "The impact of central bank digital currency variation on firm's implied volatility," Research in International Business and Finance, Elsevier, vol. 64(C).
    22. Katherine Gunny & Troy Pollard, 2023. "The role of earnings management via real activities and accrual management in PIPEs," Review of Quantitative Finance and Accounting, Springer, vol. 61(2), pages 481-500, August.
    23. Dahiya, Sandeep & Klapper, Leora & Parthasarathy, Harini & Singer, Dorothe, 2017. "Equity raising by Asian firms: Choosing between PIPEs and SEOs," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 64-83.
    24. Mu-Shun Wang, 2022. "Shareholder Disputes and Commonality in Liquidity: Evidence from the Equity Markets in China," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(2), pages 291-325, June.

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    More about this item

    Keywords

    Private placements; Equity issuance; Shareholder coordination; Debt renegotiation; Firm distress;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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