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Long-run underperformance following private equity placements: The role of growth opportunities

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  • Chou, De-Wai
  • Gombola, Michael
  • Liu, Feng-Ying

Abstract

Our results show that the post-offering performance of private equity issuers is related to growth opportunities. We find significant long-run underperformance in stock returns following private placements only for firms with high Tobin's q. High-q firms experience not only poor stock price performance but also poor operating performance. Low-q firms, in contrast, do not display significant stock price or operating underperformance. We further examine three potential explanations for this relation: over-investment in assets by managers, investor skewness preference, and over-optimism about earnings prospects. Our results are consistent with the view that investors are overly optimistic about the prospects of high growth firms.

Suggested Citation

  • Chou, De-Wai & Gombola, Michael & Liu, Feng-Ying, 2009. "Long-run underperformance following private equity placements: The role of growth opportunities," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1113-1128, August.
    • Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:1113-1128
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    Cited by:

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    2. Liang, Hsiao-Chen & Jang, Woan-Yuh, 2013. "Information asymmetry and monitoring in equity private placements," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 460-475.
    3. Cécile Carpentier & Douglas Cumming & Jean‐Marc Suret, 2012. "The Value of Capital Market Regulation: IPOs Versus Reverse Mergers," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 9(1), pages 56-91, March.
    4. Orman Hamedi Ilkhechi & Saeid Anvar Khatibi, 2020. "The Impact of Earnings Persistence on the Operating Cash Flows with Emphasis on Financial Constraints," International Journal of Business and Administrative Studies, Professor Dr. Bahaudin G. Mujtaba, vol. 6(5), pages 265-274.
    5. Cécile Carpentier & Jean-François L’Her & Jean-Marc Suret, 2013. "Private investment in small public entities," Small Business Economics, Springer, vol. 41(1), pages 149-168, June.
    6. Que, Jiangjing & Zhang, Xueyong, 2019. "Pre-IPO growth, venture capital, and the long-run performance of IPOs," Economic Modelling, Elsevier, vol. 81(C), pages 205-216.

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