Private placements and managerial entrenchment |
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| Institution: | 1. Harvard Business School, Boston, MA 02163, USA;2. National Bureau of Economic Research, Cambridge, MA 02138, USA;3. University of Illinois at Urbana-Champaign, Champaign, IL 61820, USA;1. Department of Finance, University of Akron, Akron, OH 44325, United States;2. Department of Finance, University of Central Florida, Orlando, FL 32816-1400, United States;1. School of Management and Economics, University of Electronic Science and Technology of China, Chengdu 611731, China;2. Odette School of Business, University of Windsor, Windsor, Ontario N9B 3P4, Canada;3. F.C. Manning School of Business Administration, Acadia University, Wolfville, NS B4P 2R6, Canada;4. School of Economics, Peking University, Beijing, China |
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| Abstract: | We re-examine old evidence and provide new evidence on private placements of large-percentage blocks of stock. Our goal is to judge whether the prevailing hypotheses of monitoring and certification explain most private placements. Examining new evidence on events following the private placements and using a much larger sample than previous studies, our findings suggests that private placements are often made to passive investors, thereby helping management solidify their control of the firm. Although monitoring and certification may motivate some private placements, the evidence with respect to placement discounts, stock-price reactions, the post-placement activities of the purchasers, and a comparison with arm's-length trades of large blocks of stock favors managerial entrenchment as the explanation for many private placements. |
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