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The Return on Private Investment in Public Equity

Listed author(s):
  • Cécile Carpentier
  • Jean-François L'Her
  • Jean-Marc Suret
Registered author(s):

    We examine the long-run performance following traditional private placements by Canadian public firms, to provide an explanation for the common observation that such placements are generally followed by abnormally low returns. We investigate 3,291 Canadian private investments in public equity from 1993 to 2003, and we observe a significant long-run post-issue underperformance using a classic Fama-French Three Factor Pricing Model. Adding an investment risk factor, as in Lyandres, Sun and Zhang (2008), to the calendar-time regressions sharply reduces the abnormal performance. We then take into account the discount and show that the long-run return of private equity investors differs from the shareholders' return and is normal on average. In a third step, we split the sample according to the glamour value dimension and according to the firms' investment activity. Only glamour firms with high investment activity are found to underperform in the long run. The underperformance appears to be driven by a subset of firms. Private investors obtain positive returns following private placements, if they invest in value and low investment firms. This supports the hypothesis that private investors correctly assess investment projects of value firms, while they tend to systematically overestimate investment projects of glamour firms that issue equity. Nous étudions la performance boursière postérieure aux placements privés des sociétés ouvertes au Canada, pour tenter de déterminer l'origine des rendements anormalement faibles qui suivent ce type d'opération de financement. Nous analysons 3291 placements privés effectués entre 1993 et 2003. A l'aide du modèle à facteurs de Fama et French, nous observons une contre-performance statistiquement significative que réduit l'ajout du facteur d'investissement, proposé par Lyandres, Sun and Zhang (2008). Nous tenons compte ensuite de l'escompte pour estimer le rendement du point de vue des investisseurs privés. Ceux-ci réalisent, en moyenne, des rendements supérieurs à ceux des autres actionnaires. Ces rendements sont normaux compte tenu du niveau de risque. Dans une troisième étape, nous divisons l'échantillon en fonction des caractéristiques des émetteurs. Les seuls titres qui génèrent des rendements fortement négatifs sont ceux d'entreprises de croissance dont l'activité d'investissement est importante. Les investisseurs privés réalisent des rendements positifs lorsqu'ils choisissent des titres de valeur d'entreprises qui investissent peu mais ils surévaluent systématiquement les projets d'investissement des titres de croissance.

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    Paper provided by CIRANO in its series CIRANO Working Papers with number 2010s-47.

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    Length: 32 pages
    Date of creation: 01 Dec 2010
    Handle: RePEc:cir:cirwor:2010s-47
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