Private Placements to Owner-Managers : Theory and Evidence

We present an asymmetric information model to examine private placements issued to owner-managers. Our main conclusion is that allowing private placements to insiders can mit- igate, if not eliminate, the underinvestment problem. Our model predicts that announcement period returns for private placements should be: (1) positive; (2) dependent on regulatory constraints that determine the issue price; (3) positively related to volatility; (4) negatively related to leverage; (5) negatively related to owner-managers’ shareholdings (6) inversely re- lated to proxies of manipulation; and (7) negatively related to illiquidity. We empirically test our model’s predictions, along with others from literature, on a sample of private placements issued in the Indian capital markets during 2001-09 and report empirical evidence largely consistent with the model