Abstract
This study looks into the role of corporate life cycle on market discounts and firm performance in private placements. Using the standard event study methodology with 1854 private placements, this study finds that issuing firms on average offer discounts to their investors. While growth firms obtain higher returns around the issuance of private placements, these growth firms generate poor long run post-announcement returns. The results suggest that investors may be over-optimistic to future prospects for growth firms. As old firms generally obtain higher returns in premium offers, the evidence suggests that managers of old firms would put more efforts in managing their firms after private placements. Overall, the evidence indicates that corporate life cycle can play a role to influence firm performance in private placements. The empirical findings shed lights on the importance of corporate life cycle on firm performance in private placements.
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Notes
Liu et al. (2014) examine the relationship between business life cycle and price discounts in private placements. The authors find that firms in growth stage offer lower discounts in private placements relative to those in mature and decline stage. However, their study only focuses on the Taiwan market. The authors do not look into firm performance in private placements.
Krishnamurthy et al. (2005) argue that firms engaged in private placements with unregistered shares are required to specify the restricted nature of the shares. Due to the two-year resale restriction on unregistered shares, the discount may be viewed as the compensation of the lack of liquidity in private placements.
Some firms may engage in multiple private placements during the sampling period. This study also controls for multiple transactions of private placements in the sample. If firms engage in multiple private placements within 90 days prior to the announcement date, the following transaction is not included in the sample. The results are in general remain the same.
The classification of the composition score for various corporate life cycle stages is arbitrary. While prior studies point out that firms in private placements in general be small and young, I re-classify the score at 3–5 (growth), at 6–7 (mature) and 8–9 (old) as well as 3–4 (growth), 5–6 (mature) and 7–9 (old). The results do not show any significant difference.
In conjunction with prior studies, the current study also examines the issuance of common stock only. The results quantitatively remain the same. A further analysis consistently finds that growth firms obtain higher announcement returns around the issuance of private placements. As will be discussed later, the evidence consistently reveals that growth firms generate lower post-announcement returns relative to their mature and old counterparts in private placements.
The current study also follows the study of Wruck (1989) and Hertzel and Smith (1993) to calculate discount-adjusted cumulative abnormal returns \((CAR_{adj} )\). The model specification is as follow.
$$CAR_{adj} = [1/(1 - \alpha )\left] * \right[{\text{CAR}}\left] + \right[\alpha /(1 - \alpha )\left] * \right[P_{b} - P_{0} /P_{b} ]$$where CAR is a 4-day (0, + 3) cumulative abnormal returns, \(\alpha\) is the ratio of the number of shares placed to the number of shares outstanding after the placement, \(P_{b}\) is the market price at the end of the day prior to the event window (day − 1), and \(P_{0}\) is the placement price. The overall sample obtains positive discount-adjusted CAR at 2.73% % over a 4-day (0, + 3) event window around the issuance of private placements. Using a 3-day (− 1, + 1) event window, the results do not show any significant difference in discount-adjusted CAR at 2.70%. While the inconsistent results show that mature firms create higher discount-adjusted CAR over a (0, + 3) event window than growth and old firms, growth firms consistently generate higher returns than their mature and old counterparts measured by a (− 1, + 1) event window. Hence, the analysis of discount-adjusted CAR can be more sensitive to the event window selected.
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Chuang, KS. Private placements, market discounts and firm performance: the perspective of corporate life cycle analysis. Rev Quant Finan Acc 54, 541–564 (2020). https://doi.org/10.1007/s11156-019-00798-4
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DOI: https://doi.org/10.1007/s11156-019-00798-4