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Shareholder gains from equity private placements: Evidence from the Stockholm Stock Exchange

  • Molin, Johan

    (Department of Finance)

Registered author(s):

    This paper examines the stock price reactions to equity private placements and rights issues on the stockholm Stock Exchange and analyzes private placement discounts. The combined results reinforce the preliminary support for Wruck's (1989) monitoring hypothesis and the Hertzel and smith (1993) information hypothesis; the announcement effects are significantly positive for private placements and insignificant for rights issues. Cross- sectional analysis suggests that a substantial part of the variation in private placement discounts and market reactions to private placement announcements can be explained by a combination of increased monitoring and closer alignment of manager and owner interests as implied by agency theory. The paper also presents evidence on significant information effects. These appear not to be generated by sophisticated signaling mechanisms, but rather by responses to the more trivial signals inherent in the announcements of resolutions of acute financial problems.

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    Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 101.

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    Length: 34 pages
    Date of creation: Feb 1996
    Date of revision:
    Handle: RePEc:hhs:hastef:0101
    Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
    Phone: +46-(0)8-736 90 00
    Fax: +46-(0)8-31 01 57
    Web page: http://www.hhs.se/
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    1. Loderer, Claudio F. & Sheehan, Dennis P. & Kadlec, Gregory B., 1991. "The pricing of equity offerings," Journal of Financial Economics, Elsevier, vol. 29(1), pages 35-57, March.
    2. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June.
    3. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    4. Smith, Clifford Jr., 1977. "Alternative methods for raising capital : Rights versus underwritten offerings," Journal of Financial Economics, Elsevier, vol. 5(3), pages 273-307, December.
    5. Masulis, Ronald W. & Korwar, Ashok N., 1986. "Seasoned equity offerings : An empirical investigation," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 91-118.
    6. Hertzel, Michael G & Smith, Richard L, 1993. " Market Discounts and Shareholder Gains for Placing Equity Privately," Journal of Finance, American Finance Association, vol. 48(2), pages 459-85, June.
    7. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 327-49, June.
    8. Dodd, Peter & Warner, Jerold B., 1983. "On corporate governance : A study of proxy contests," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 401-438, April.
    9. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    10. Bradley, Michael & Wakeman, L. Macdonald, 1983. "The wealth effects of targeted share repurchases," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 301-328, April.
    11. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
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    13. Varma, Raj & Szewczyk, Samuel H., 1993. "The private placement of bank equity," Journal of Banking & Finance, Elsevier, vol. 17(6), pages 1111-1131, December.
    14. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    15. Eckbo, B. Espen & Masulis, Ronald W., 1992. "Adverse selection and the rights offer paradox," Journal of Financial Economics, Elsevier, vol. 32(3), pages 293-332, December.
    16. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    17. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    18. Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices," The Journal of Business, University of Chicago Press, vol. 45(2), pages 179-211, April.
    19. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    20. Bhagat, Sanjai, 1983. "The effect of pre-emptive right amendments on shareholder wealth," Journal of Financial Economics, Elsevier, vol. 12(3), pages 289-310, November.
    21. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    22. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    23. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 61-89.
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