Relationships, corporate governance, and performance: Evidence from private placements of common stock
Journal
Journal of Corporate Finance
Journal Volume
15
Journal Issue
1
Pages
30-47
Date Issued
2009
Author(s)
Wruck K.H.
Abstract
Using data from private placement contracts, we analyze relationships between investors and issuers, and their impact on corporate governance and performance. Most investors have a relationship with the issuer pre-placement and many new relationships are formed through the placement agreement. New relationships are largely governance-related (board seats and/or 5% or greater blocks), but also include key business partnerships and/or employment arrangements. We have three main findings. First, new relationships drive the positive stock price response at announcement; placements lacking new relationships are non-events. Second, investors with relationship ties to the issuer are more likely to gain directorships as part of the placement. Third, new relationships are associated with stronger post-placement profitability and stock price performance. Overall, our findings are consistent with private placements creating value when they are associated with increased monitoring and strong governance. ? 2008 Elsevier B.V. All rights reserved.
Subjects
Agency theory; Asymmetric information; Entrenchment; Equity issuance; Ownership concentration; Private equity; Private placement; Relationship investing; Relationship investor; Relationship-specific investment, governance, blockholders; Specific investment
SDGs
Type
journal article