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Risk, Timing and Overoptimism in Private Placements and Public Offerings

  • Cécile Carpentier
  • Jean-François L'Her
  • Stephan Smith
  • Jean-Marc Suret
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    We examine whether risk, timing or mispricing hypotheses can explain the underperformance of private and public equity issuers, in Canada, where both categories share several common characteristics. Adding an investment risk factor to the TFPM reduces, but does not eliminate, the underperformance. Four arguments, including financial constraints and poor operating performance, do not support the timing hypothesis. Our results for their part support the mispricing hypothesis. The market correctly assesses the investment projects of value firms, but tends to overestimate those of glamour firms. For both types of issues, the underperformance is explained by investors' overoptimism relative to glamour/high-investment firms. Nous tentons de vérifier laquelle des hypothèses de risque, de timing ou d'irrationalité peut expliquer la sous performance à long terme des émetteurs de placement privés et public au Canada, où ces deux types de financement ont en commun plusieurs caractéristiques. L'ajout d'un facteur d'investissement au modèle à trois facteurs réduit, mais n'élimine pas, cette sous performance. Quatre arguments, incluant ceux des contraintes financières et de la faible performance opérationnelle contredisent l'hypothèse du timing. Nos résultats tendent à confirmer l'hypothèse de l'irrationalité. Le marché évalue correctement les projets d'investissement des sociétés de valeur, mais sur estime ceux des titres de croissance. Pour les deux types de financement, la sous performance est expliquée par le sur optimisme des investisseurs au sujet des entreprises de croissance à fort niveau d'investissement.

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    File URL: http://www.cirano.qc.ca/files/publications/2007s-27.pdf
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    Paper provided by CIRANO in its series CIRANO Working Papers with number 2007s-27.

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    Length: 51 pages
    Date of creation: 01 Nov 2007
    Date of revision:
    Handle: RePEc:cir:cirwor:2007s-27
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