Evidence on equity private placements and going-out-of-business information release

Abstract

In our study, shareholder wealth gains around announcements of equity private placements primarily came from firms which subsequently went out of business. Investors’ positive response was consistent with an expected greater survival likelihood for more troubled firms, but with no such revisions for stronger companies. Inconsistent with their apparent beliefs, going-out-of-business companies had statistically significant and material negative abnormal returns that averaged 17.5% from prior to and until 150 days after the announcement period. Still-in-business companies had insignificant abnormal returns over either the announcement or post announcement period. The evidence on failing businesses is consistent with a semi-strong form of efficient markets hypothesis violation.