Equity financing in a Myers–Majluf framework with private benefits of control

Understanding the Positive Announcement Effects of Private Equity Placements: New Insights from Hong Kong Data

“…Firm size is a reasonable proxy for information asymmetries about new investment relative to those about assets in place. As argued by Wu and Wang (2005), the smaller a firm, the more asymmetric information concerns future growth opportunities rather than assets in place, suggesting that the coefficient of firm size should be negative. By the way, there is no correlation between Ln(MV) and Discount (p-values: 0.92, 0.35 and 0.61 for the pooled and the two separate -private and public placements -samples, respectively).…”

“…where R it is daily return on issuing firm i, R mt is daily value-weighted market return, SMB (Cooney and Kalay, 1993;Wu and Wang, 2005;Eckbo and Norli, 2005a). For example, Wu and Wang (2005) predict that positive announcement effects are more likely to occur if the asymmetric information arises more from investment opportunities than from assets in place (see also Ambarish, John and Williams, 1987, in a non-Myers-Majluf context).…”

“…For example, Wu and Wang (2005) predict that positive announcement effects are more likely to occur if the asymmetric information arises more from investment opportunities than from assets in place (see also Ambarish, John and Williams, 1987, in a non-Myers-Majluf context). These effects are particularly likely in a market like Hong Kong, which in the period from 1970 to 1997 had the highest volatility -as well as the highest average return -among the top ten equity markets by capitalization (Wu and Bae, 1999).…”

“…While a positive SEO announcement effect appears to be inconsistent with the separating equilibrium of Myers and Majluf (1984), papers that generalize the Myers-Majluf model such as Cooney and Kalay (1993), Wu and Wang (2005) and Eckbo and Norli (2005a) do imply a positive announcement effect in certain circumstances. For example, Wu and Wang (2005) suggest that a positive SEO announcement effect occurs when the adverse selection effect, primarily arising from asymmetric information about assets in place, is overwhelmed by the positive information effect from asymmetric information about corporate growth opportunities -a situation virtually ruled out in Myers and Majluf (1984). Since studies of SEOs by U.S. firms show positive announcement effects only for private placements, the use of international data can address important issues that cannot be fully spelled out using U.S. data.…”

Corporate Governance and Investment Decisions

“…Consistent with Jensen's argument, the model predicts that corporate managers use internal funds to invest in projects with a lower marginal value to shareholders than marginal cost. Wu and Wang (2005) consider a model similar to the one of Myers and Majluf (1984) but assume that managers derive private benefits of control from overinvestment. They find that private benefits amplify overinvestment but alleviate underinvestment.…”