The Choice between Public and Private Equity Offerings

Abstract

This paper empirically examines the determinants of the choice between private and public offerings and expected price discounts by using a new database, which details the buyers and contracts of private placements in high-technology industries between 1986 and 1997. The estimates indicate that public investors' prior information and the risk measure are, by a large margin, the two most important determinants of private placement likelihood. My argument on the determinants of the expected price discount, if private placement buyers are ex ante informed investors, draws on models by Maksimovic and Pichler (1999) and (Rajan (1992). One view holds that the expected price discount is driven by the cost of motivating the truth-telling value of the private information (Maksimovic and Pichler (1999)). A competing view holds that informed investors are able to use their bargaining power obtained through informational advantages to require strictly positive expected excess returns, which are not directly related to the value of the private information (Rajan (1992)). Overall, I find that private placements to ex ante informed buyers are associated with significant increases in companies' stock prices. However, there is limited evidence that entrenched management purchases private placements on favorable terms that might serve as self-dealings.