Strategic Posture and Registration Rights in Private Placements

Abstract

This study examines how proprietary costs of mandatory disclosure influence the decision to exclude registration rights in private placements. Registration rights oblige the issuer to register with SEC in a three-to-seven-month period subsequent to private placements, therefore pre-committing the issuer to mandatory disclosure. I find that, at the industry level, industries dominated by players with “product differentiation strategy” have a larger proportion of private placements without registration rights than product markets dominated by players with “low cost strategy”. The finding is consistent with the theoretical prediction from Darrough (1993) that product differentiation discourages firms from the pre-commitment to disclosure of firm-specific information. Within the same industry, a larger proportion of private placements exclude registration rights when mandatory reporting standards impose higher proprietary costs. Finally, at the firm level, firms with higher abnormal profitability are more likely to exclude registration rights in private placements to protect their abnormal profitability from competition.