The Performance of Issuing Equity: The Case of Private Placements of Equity and Seasoned Equity Offerings in Taiwan

Abstract

Companies' choice between public offerings (seasoned equity offerings, SEOs) and private placements of equity may convey distinct information and result in different performance. This study investigates that issue by examining announcement and post-issue abnormal returns of companies that make public and private equity offerings. The results show that SEO companies have a negative announcement effect and poor post-issue performance, especially for those with great opportunity costs of issuance. They are consistent with the information asymmetry argument and the timing model. On the other hand, companies conducting private placements elicit a positive response from investors at announcements, and deliver returns slightly lower than the market but higher than their matching sample three years after issue. This suggests that private placements help companies survive, while these companies may not be good targets for long-run investment. We also find that private-placement companies giving greater compensation to new-issue buyers tend to have better short-run but poorer long-run performance, implying that investors overestimate the certification effect.