THE JOURNAL OF FINANCE•VOL.LVII,NO.6•DECEMBER2002
Long-Run Performance following Private
Placements of Equity
MICHAEL HERTZEL,MICHAEL LEMMON,
JAMES S.LINCK,and LYNN REES*
ABSTRACT
Public firms that place equity privately experience positive announcements effects,
with negative post-announcement stock-price performance.This finding is incon-
sistent with the underreaction hypothesis.Instead,it suggests that investors are
overoptimistic about the prospects of firms issuing equity,regardless of the method
of issuance.Further,in contrast to public offerings,private issues follow periods of
relatively poor operating performance.Thus,investor overoptimism at the time of
private issues is not due to the behavioral tendency to overweight recent experi-
ence at the expense of long-term averages.
I T IS WELL ESTABLISHED that the stock market reacts negatively to announce-ments of seasoned equity issues.1Recently,Spiess and Aff leck-Graves~1995! and Loughran and Ritter~1997!document that,in addition to the negative announcement period returns,issuing firms experience abnormally low stock returns over the five years following the issue announcement.One explana-tion of these findings is that managers time equity issues to take advantage of“windows of opportunity”to issue overvalued equity.This explanation requires not only that investors are overly optimistic about the issuing firms’prospects at the time of the issue announcement,but also that investors underreact to information conveyed by the announcement.While Fama~1998! argues that the results ref lect normal random variations that occur in effi-cient markets,the long-run post-announcement abnormal stock-price per-formance is widely viewed as presenting an important challenge to the traditional paradigm of market efficiency.
*Hertzel is at Arizona State University,Lemmon is at the University of Utah,Linck is at the University of
Georgia,and Rees is at Texas A&M University.We thank Kent Daniel,Steve Foerster,Ludger Hentschel,Sherry Jarrell,Srini Kamma,Ed Kane,Ajay Khorana,S.P.Kothari, Wayne Mikkelson,Jim Nelson,Cliff Smith,two anonymous referees,Rick Green and RenéStulz~the editors!,and seminar participants at the American Graduate School of International Management,the University of Arizona,Arizona State University,Georgia Tech,the University of Miami,the University of Rochester,Texas A&M University,the University of Western On-tario,the1997Financial Management Association Meetings,and the1998Southern Finance Association meetings for helpful comments.Greg Durham,Lalitha Naveen,and Jerry Chen provided valuable research assistance.Hertzel acknowledges financial support from the Dean’s Council of100Faculty Summer Grant Program and the Jack B.Furst Private Equity Research Program.Any errors or omissions are the responsibility of the authors.
1See,for example,Asquith and Mullins~1986!,Masulis and Korwar~1986!,and Mikkelson and Partch~1986!.
2595
2596The Journal of Finance
Providing an additional challenge to the traditional framework are behav-ioral theories that have been
advanced to explain:~1!investor overoptimism at the time of the issue announcement,and~2!investor underreaction to information conveyed by the announcement.For example,Loughran and Rit-ter~1997!argue that investor overoptimism at the time of the issue may ref lect the behavioral tendency,as observed in psychology studies,for hu-mans to overweight recent experience at the expense of long-term averages.2 They show that operating performance peaks at the time of the equity issue, and suggest that the post-announcement stock-price decline ref lects overex-trapolation by investors of the pre-issue trend in operating performance. Daniel,Hirshleifer,and Subrahmanyam~1998!formalize the underreaction hypothesis in a model where investors are overconfident and have biased self-attribution.Given these behavioral attributes,they show that the val-uation effects of public news events will not be fully incorporated at the announcement,and that subsequent abnormal performance will continue in the same direction as the announcement period returns.3
In this study,we provide further evidence on investor behavior and expec-tations around equity issues by investigating the stock-price and operating performance of a sample of publicly traded firms conducting private equity issues.In contrast to public equity issues,which are underwritten,regis-tered with the Securities and Exchange Commission,and sold to a large number of investors,private equity is
sues are typically negotiated directly with a single or small group of investors without SEC oversight.Our study is motivated,in part,by evidence that announcements of public and private equity issues are associated with opposite stock-price effects:While public issues,on average,are associated with negative stock-price effects,private issues are associated with positive stock-price effects.The positive stock-price response to the announcement of private equity issues sets the stage for an interesting experiment,since the underreaction hypothesis predicts continued positive stock-price performance following the announcement, whereas investor overoptimism associated with the“windows of opportu-nity”framework predicts long-run post-announcement underperformance. For a sample of619publicly traded firms announcing private placements of equity during the1980to1996period,we find that positive announce-ment period returns are followed by abnormally low post-announcement stock-price performance.In our sample,the mean raw buy-and-hold return for the three-year period following private equity issue announcements is only0.2per-cent.Relative to a size-and-book-to-market matched sample of control firms, the mean three-year buy-and-hold abnormal return isϪ23.8percent.This 2See,for example,Kahneman and Tversky~1982!.
3Appendix A in Daniel et al.~1998!lists a variety of settings in which evidence of under-reaction has been documented.They state that the underreaction anomaly is“pervasive”with a pattern that“obtains f
or the great majority of event studies.”In contrast,Kang,Kim,and Stulz~1999!do not find evidence consistent with the underreaction hypothesis for Japanese equity issues.
Long-Run Performance following Private Placements of Equity2597 level of underperformance is similar to that found for initial public offerings ~e.g.,Ritter~1991!and Loughran and Ritter~1995!!and seasoned equity ,Loughran and Ritter~1995,1997!and Spiess and Aff leck-Graves~1995!!,and suggests that investors are overoptimistic about the pros-pects of firms that issue equity,regardless of the method of issuance.We do not find evidence consistent with the underreaction hypothesis.Instead,our evidence suggests that the direction of the average announcement effect is incorrect.We discuss the implications of this for earlier studies by Wruck ~1989!and Hertzel and Smith~1993!that offer explanations for the positive stock-price reaction to private placement announcements.
documented evidenceGiven the evidence of investor overoptimism,we next investigate whether the behavioral explanation of investor overoptimism around public equity is-sues holds in the case of private equity issues.In sharp contrast to evidence that public equity issues tend to follow periods of above average operating per-formance,we find that private equity issues tend to follow periods of rela-tively poor operating performance.Thus,the behavioral tendency for humans to overweight recent experience cannot explai
n investor overoptimism around the time of private issue announcements.In fact,our results suggest that,if anything,investors put insufficient weight on recent performance,that is, investors appear to be overly optimistic that the poor current operating per-formance will improve in the future.Consistent with this,we find high market-to-book ratios and significant stock-price run-ups prior to private equity issues. To further investigate the nature of investor overoptimism at the time of pri-vate issue announcements,we examine the pattern of capital and R&D ex-penditures in the periods surrounding the private issues in our sample.Loughran and Ritter~1997!find that firms that issue publicly tend to have above aver-age capital expenditures both before and after the issue and view this as evi-dence that investors and managers may be too optimistic about the prospects of these new investments.We document a similar pattern for firms that issue equity privately,and suggest that investors may similarly be overoptimistic about the future growth opportunities of firms that issue equity privately. In addition to the positive announcement period stock-price reaction,an-other interesting feature of private equity issues is that they are typically sold to investors at substantial discounts from current market value~16per-cent,on average,for our sample!.Prior literature suggests the discounts ref lect compensation to private placement investors for expected monitoring services and expert advice~Wruck~1989!!,illiquidity~Silber~1991!!,and information production~Hertzel and Smith~1993!!.Our findings suggest another potential explanation,that is,the negative post-issue stock-
price performance suggests that private placement discounts may ref lect private investors’assessments of true~lower!firm value.4
4This finding has potentially important implications for the widely used practice in the appraisal industry of relying on discounts from private placement studies as an estimate of the illiquidity discount used when valuing minority interests in private firms.See Koeplin,Sarin, and Shapiro~2000!and Bajaj et al.~2001!for recent discussions of this practice.
2598The Journal of Finance
The remainder of our paper is organized as follows.In Section I,we de-scribe our data and research methods.In Section II,we provide evidence on post-announcement stock-price performance and tests of the underreaction hypothesis.Section III examines the operating performance and capital ex-penditures of our sample firms and explores sources of overoptimism at the time of the issue.Section IV discusses the implications of our findings for prior studies that have been advanced to explain positive announcement effects and the sizable discounts at which shares are issued to private place-ment investors.Section V concludes.
I.Data and Research Methodology
A.Sample Description
Through Dow Jones News Retrieval Service searches,we identify952an-nouncements of equity private placements from the1980to1996period by firms that existed on the Center for Research in Security Prices~CRSP! NYSE0AMEX0Nasdaq monthly stock files at the year-end prior to the pri-vate placement announcement.5To avoid potential problems with low-price stocks~Ball,Kothari,and Shanken~1995!!,we exclude209firms with a price less than two dollars at the time of the private placement announce-ment.We also eliminate124firms that had completed a private placement within the preceding three years~the firm’s first private placement is in-cluded in the sample!,leaving us a final sample of619equity private placements.
The private placements in our sample are most heavily concentrated in the periods1985to1987and1991to1993.Firms traded on Nasdaq com-prise79percent of the sample.By comparison,50percent of the public offerings in the Spiess and Aff leck-Graves~1995!sample are Nasdaq firms. Aggregate proceeds raised from the private placements in our sample is $9.1billion~in1996dollars!,$5.6billion of which is raised by Nasdaq firms.
Panel A of Table I shows that the sample spans a large number of in-dustries.However,some clustering
is evident,with just under55percent of the sample belonging to six industry groups~chemicals and allied prod-ucts,electric and electronic equipment,holding and other investment of-fices,instruments and related products,industrial machinery and equipment, and business services!.To address this issue,we control for industry ef-fects in our empirical analysis.Panel B indicates that the average proceeds raised from the private placements in our sample is$12.7million,and that the mean number of new shares issued as a percentage of total shares outstanding after the issue is21.2percent.In contrast,Krishnamurthy et al.~1999!report,over a similar time period,average proceeds of$48.8 5Our sample period ends in1996because we need at least three years of post-announcement data for most of our analyses.
Table I
Sample Characteristics of Equity Private Placements
from1980to1996
Through Dow Jones News Retrieval Service searches,we identified952announcements of eq-uity private placements over the1980to1996period for firms covered on the CRSP monthly stock files~NYSE0AMEX0Nasdaq!at the year-end prior to the private placement announce-ment.We eliminat
ed observations with a price less than two dollars at the time of the an-nouncement,and those where the firm had a previous private placement in the last three years, leaving a sample of619private placement announcements from1980to1996.Panel A reports the distribution of sample firms across two-digit SIC codes,and Panel B reports various sample characteristics of the private placement and the private placement firms.Significance of the announcement period return is based on the market model standardized residual method with Scholes–Williams~1977!betas.
Panel A:Distribution of Sample Firms across Two-Digit SIC Codes
SIC Code N
%of Sample
Chemicals and allied products288814.2 Electric and electronic equipment36609.7 Holding and other investment offices67599.5 Instruments and related products38497.9 Industrial machinery and equipment35477.6 Business services7337  6.0 Health services8030  4.8 Oil and gas extraction1321  3.4 Communication4820  3.2 Banking6020  3.2 Engineering and management services8714  2.3 Motion pictures7813  2.1 Wholesale trade–durable goods5012  1.9 Other14924.2 Total619100.0
Panel B:Sample Characteristics of Equity Private Placements
N b Mean Median
Dollar proceeds~millions!581$12.7$4.5 Fraction placed~%of shares after private placement!49321.2%13.9% Market value of equity~millions!619$188.6$31.9 Book-to-market5910.430.26 Discount~%of market price at month-end prior to event!40416.5%13.4% Announcement period abnormal return:DaysϪ3to0a619  2.4%0.7% Discount adjusted annc.period abnormal return:DaysϪ3to0a39815.2%  3.7% a Announcement period return significantly different from zero at the one percent level.Sig-nificance based on the market model standardized residual method with Scholes–Williams~1977! betas.
b Number of observations varies across statistics due to differing disclosures in the private placement announcements.Number of“discount adjusted annc.period abnormal return”ob-servations is lower than the number of discount observations because insufficient data was available to calculate the fraction placed.
Long-Run Performance following Private Placements of Equity2599

版权声明：本站内容均来自互联网，仅供演示用，请勿用于商业和其他非法用途。如果侵犯了您的权益请与我们联系QQ:729038198，我们将在24小时内删除。