Shareholder gains from equity private placements: Evidence from the Stockholm Stock Exchange

This paper examines the stock price reactions to equity private placements and rights issues on the stockholm Stock Exchange and analyzes private placement discounts. The combined results reinforce the preliminary support for Wruck's (1989) monitoring hypothesis and the Hertzel and smith (1993) information hypothesis; the announcement effects are significantly positive for private placements and insignificant for rights issues. Cross- sectional analysis suggests that a substantial part of the variation in private placement discounts and market reactions to private placement announcements can be explained by a combination of increased monitoring and closer alignment of manager and owner interests as implied by agency theory. The paper also presents evidence on significant information effects. These appear not to be generated by sophisticated signaling mechanisms, but rather by responses to the more trivial signals inherent in the announcements of resolutions of acute financial problems.