INVESTOR OVEROPTIMISM AND PRIVATE EQUITY PLACEMENTS

We reexamine investor tendency to overweight recent experiences when predicting future performance of firms by examining a sample of firms making private equity placements. Our findings are consistent with the projection argument that investors use the recent experiences of other firms to predict the success of placing firms. Specifically, we find that the placements preceded by a larger number of recently very successful firms are associated with the significantly more favorable market reaction to the placement announcement and significantly poorer post‐placement stock price performance.     

RAISING CAPITAL WITH PRIVATE PLACEMENTS OF DEBT

In this study the role of private placements of debt in the capital acquisition decision of public utilities is investigated. Whereas public offerings are sales of securities through financial intermediaries to the public-at-large, private placements are direct sales of securities by an issuing corporation to a limited number of institutional investors. In contrast to the negative stock price reactions typically found for public security sales, private placements are associated with significant positive abnormal returns in the shares of the issuing public utilities. Also, larger private placements appear to elicit a more favorable market response. Results are consistent with reduced information asymmetries and increased monitoring of the issuing firm resulting from the private placement.     

THE ROLE OF INVESTMENT BANK REPUTATION AND RELATIONSHIPS IN EQUITY PRIVATE PLACEMENTS

We explore the role of placement agents in equity private placements. Reputable agents are more likely to place shares of firms that have performed better and that have had frequent prior relationships with the agent. Controlling for self‐selection and endogeneity, firms using reputable agents offer smaller price discounts. However, issuers having frequent prior relationships with placement agents incur higher gross spreads. Although the results support the certification role of investment banks in private placements, they also shed light on the costs incurred by issuers that frequently rely on the same investment bank.     

HEDGED DIVIDEND CAPTURE AND EX-DAY RETURNS: AN EMPIRICAL UPDATE

We find that the magnitude of abnormal ex-day returns exhibited by US equities diminished in 1987 and 1988, subsequent to the US Tax Reform Act of 1986. We also report the results of a dividend capture strategy, hedged with the sale of stock index futures contracts. Hedging removes more than 50 percent of the risk of dividend capture, and even after transactions costs, can provide returns in excess of buying and holding the market portfolio of equities.     

FOREIGN EXCHANGE AND CROSS-BORDER VALUATION

Should a corporate financial manager analyze a cross-border investment proposal from the perspective of the foreign currency or the home currency? The conventional wisdom among economists is that it doesn't matter–the valuation of an asset should be the same in one currency as in another, given the spot FX rate. This assertion implies that it is irrelevant whether we analyze an overseas investment's NPV in the home currency or the foreign currency, as long as we use consistent cross-border conversions.
But what happens if managers' foreign exchange forecasts differ from the efficient markets forecast that is implicit in interest rates? In that case, as this article demonstrates through a series of examples, managers' FX forecasts can affect their investment, hedging, and financing decisions.     

AN ANALYTICAL MODEL OF THE RELATIONSHIP BETWEEN MATURITY AND BONDS RISK DIFFERENTIALS

This paper extends previous analyses of bond risk differentials by relaxing the key assumption of a constant probability of firm survival. Under the less restrictive assumption that firm income is stationary and independent over time, it is shown that risk differential clearly varies with maturity even with a flat term structure. Because the payoff possibilities of multi-period bonds are interdependent even though income in each period is independent, risk differentials must depend on maturity, even if term structure is flat. This conclusion is more compatible with empirical findings than were conclusions of previous analyses.     

PRIVATE EQUITY: SOURCES AND USES

Private equity capital is playing a large and growing role in the funding of small to medium-sized, high-growth businesses. Today's private equity investment typically takes the form of purchase of a minority interest in a post-start-up, high-technology company followed by an IPO a few years later. A large number of such investors are scouring the markets for new investment possibilities and the competitive pressures are growing.
Although private equity investors can and often do add significant value to a company, private equity is potentially expensive, in terms of both loss of ownership and loss of control over long-term strategic decisions of the company. Owner-managers who want to retain as much of both as possible are advised to install more formalized business procedures, expand the company's outside relationships, and become more familiar with the company's financial needs and options. These changes should reduce capital needs, reduce the costs of private equity funding, and increase negotiating leverage when dealing with large, sophisticated private capital investors.