The Private Placement of Debt and Outside Equity as an Information Revelation Mechanism

Habib, Michel A.; Johnsen, D. Bruce

doi:10.1093/rfs/13.4.1017

Cited by 35 publications

(18 citation statements)

References 40 publications

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“…16 Consistent with Hertzel, Lemmon, Linck, and Rees (2002), we find a negative relation between short-and long-term returns for traditional PIPEs. Though PIPE issuing companies 14 The cost of information production as it relates to the decision to sell equity privately versus publicly is explored in Chemmanur and Fulghieri (1999);and Habib and Johnsen (2000). 15 The buy-and-hold return relatives are normalized to one on the closing day.…”

Section: Stock Price Performancementioning

confidence: 99%

Hedge Funds as Investors of Last Resort?

Brophy¹,

Ouimet²,

Sialm³

2006

Rev. Financ. Stud.

190

163

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Hedge funds have become important investors in public companies raising equity privately. Hedge funds tend to finance companies that have poor fundamentals and pronounced information asymmetries. To compensate for these shortcomings, hedge funds protect themselves by requiring substantial discounts, negotiating repricing rights, and entering into short positions of the underlying stocks. We find that companies that obtain financing from hedge funds significantly underperform companies that obtain financing from other investors during the following two years. We argue that hedge funds are investors of last resort and provide funding for companies that are otherwise constrained from raising equity capital. (JEL G14, G23, G32)Hedge funds have recently become an important source of funding for public companies raising equity privately. Financing young companies with severe information asymmetries is an important investment strategy for some hedge funds. Since 1995, hedge funds have participated in more than 50% of the private placements of equity securities and have contributed about one-quarter of the capital raised in such equity issuances, a total investment that has exceeded the contributions of other investor classes. This paper sheds light on the role of hedge funds in such private placements.In perfect financial markets it should be irrelevant whether a firm obtains funding from hedge funds or from other investors. To investigate whether the identity of the investors matters, we use a unique dataset that

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Section: Stock Price Performancementioning

confidence: 99%

Hedge Funds as Investors of Last Resort?

Brophy¹,

Ouimet²,

Sialm³

2006

Rev. Financ. Stud.

190

163

View full text Add to dashboard Cite

show abstract

“…The finance literature suggests that the successful arrangement of private bank loans may benefit shareholder wealth in ways that public debt arrangements do not. The positive value effects may arise from monitoring benefits provided by private lenders, or, in the presence of information asymmetries, by the certification effect of the bank's willingness to make the loan (Diamond 1984, Fama 1985, Mikkelson and Partch 1986, James 1987, Best and Zhang 1993, Billett, Flannery and Garfinkel 1995, Habib and Johnson 2000.…”

Section: Shareholder Wealth and Private Debt Financingmentioning

confidence: 99%

Wealth Effects of Diversification and Financial Deal Structuring: Evidence from REIT Property Portfolio Acquisitions

Campbell

Petrova

Sirmans

2003

Real Estate Economics

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This study examines the strategic characteristics and shareholder wealth effects of a popular vehicle for Real Estate Investment Trust growth in the 1990s: the acquisition of a portfolio of properties from a single seller. We examine a sample of 209 REIT portfolio acquisitions during 1995-2001. We observe a wide variety of financing strategies and find an array of different categories of sellers. Contrary to results reported in real estate transactions of this sort in the past, we find that announcement-period shareholder returns are significantly positive in the aggregate. We present evidence that excess returns to acquirers result from (1) wealth benefits received when companies reconfirm their geographical focus in the acquisition, (2) positive information conveyed by the use of project-specific private debt and (3) a positive signal sent to the market when transactions are financed by stock privately placed with financial institutions. Copyright 2003 by the American Real Estate and Urban Economics Association

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“…While the current paper focuses on how VC contracts deal with moral hazard issues, Cornelli and Yosha (1997), Bergemann and Hege (1998), Habib and Johnsen (2000), and Dessi (2001) analyze how financial contracts elicit information revelation, and are useful in discriminating across projects and taking efficient continuation or liquidation decisions.”…”

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confidence: 99%

Financing and Advising: Optimal Financial Contracts with Venture Capitalists

Casamatta¹

2003

The Journal of Finance

526

301

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This paper analyses the joint provision of e¡ort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert e¡ort.With moral hazard, if the entrepreneur's e¡ort is more e⁄cient (less costly) than the advisor's e¡ort, the latter is not hired if she does not provide funds. Outside ¢nancing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside ¢nancing determines whether common stocks or convertible bonds should be issued in response to incentives.

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The Private Placement of Debt and Outside Equity as an Information Revelation Mechanism

Cited by 35 publications

References 40 publications

Hedge Funds as Investors of Last Resort?

Hedge Funds as Investors of Last Resort?

Wealth Effects of Diversification and Financial Deal Structuring: Evidence from REIT Property Portfolio Acquisitions

Financing and Advising: Optimal Financial Contracts with Venture Capitalists

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