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Equity private placements, liquid assets, and firm value

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  • Brooks
  • J. Graham

Abstract

This paper finds wealth enhancement from equity private placement issuances where liquid assets are provided to slack-poor companies. This result runs counter to the expected Jensen's (1986) excess free-cash-flow problem, where the predominant findings of numerous studies include negative wealth effects from externally financed liquidity enhancements. We also find greater announcement-period returns for smaller firms and firms with better recent performance. Investors appear to view either of these factors, together with the private investor’s willingness to provide additional liquidity, as an asymmetric information release on the firm’s viability and likelihood of improved performance. Copyright Springer 2005

Suggested Citation

  • Brooks & J. Graham, 2005. "Equity private placements, liquid assets, and firm value," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 29(3), pages 321-336, September.
    • Handle: RePEc:spr:jecfin:v:29:y:2005:i:3:p:321-336
    DOI: 10.1007/BF02761578
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    References listed on IDEAS

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    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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    5. Smith, Richard L & Kim, Joo-Hyun, 1994. "The Combined Effects of Free Cash Flow and Financial Slack on Bidder and Target Stock Returns," The Journal of Business, University of Chicago Press, vol. 67(2), pages 281-310, April.
    6. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    7. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    8. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, April.
    9. Bayless, Mark & Chaplinsky, Susan, 1996. "Is There a Window of Opportunity for Seasoned Equity Issuance?," Journal of Finance, American Finance Association, vol. 51(1), pages 253-278, March.
    10. Wruck, Karen Hopper, 1989. "Equity ownership concentration and firm value : Evidence from private equity financings," Journal of Financial Economics, Elsevier, vol. 23(1), pages 3-28, June.
    11. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
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    13. repec:bla:jfinan:v:44:y:1989:i:3:p:771-87 is not listed on IDEAS
    14. Janney, Jay J. & Folta, Timothy B., 2003. "Signaling through private equity placements and its impact on the valuation of biotechnology firms," Journal of Business Venturing, Elsevier, vol. 18(3), pages 361-380, May.
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    Cited by:

    1. 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.
    2. Madhuri Malhotra & M. Thenmozhi & Arun Kumar Gopalaswamy, 2011. "Evidence on Changes in Time Varying Volatility around Bonus and Rights Issue Announcements," Working Papers 2011-061, Madras School of Economics,Chennai,India.
    3. Marcos Melo & Feruccio Bilich, 2013. "Expectancy balance model for cash flow," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(2), pages 240-252, April.
    4. Fonseka, M.M. & Colombage, Sisira R.N. & Tian, Gao-Liang, 2014. "Effects of regulator's announcements, information asymmetry and ownership changes on private equity placements: Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 126-149.

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