Earnings and Risk Changes around Private Placements of Equity

Abstract

This paper investigates earnings and risk changes for a sample of firms that issued equity in a private placement. The study is motivated by empirical findings that announcements of public and private sales of equity are associated with opposite stock price effects. We find that earnings increase significantly subsequent to the equity offer and that postoffer earnings changes are positively correlated with announcement period stock price effects. We do not find evidence that private equity sales convey information about the underlying riskiness of firms' assets. These results suggest that private placements of equity convey favorable information to investors about future earnings and contrast with evidence from earlier studies that announcements of public equity issues convey unfavorable information about future prospects.