The Role of Corporate Governance and Information Asymmetry in Private Placement in Australia

Abstract

In a private sale of equity, the issuing firm sells a block of securities to an individual or a small group of investors at a discounted price. Non-participating shareholders suffer from ownership dilution and are also deprived of the discount. We provide the first evidence on whether and how corporate governance can protect non-participating shareholders’ interests in private placements. Based on a sample of 329 private placements issued by the top 250 Australian listed firms between 2002 and 2009, we find firms with a higher governance index, a larger proportion of independent directors, and a larger board are more likely to issue private placements with a share purchase plan (SPP), which protects non-participating shareholders from ownership dilution. However corporate governance has no impact on private placement discounts. There is also evidence that private placement discounts compensate investors for information asymmetry. Our findings are robust to corrections for endogeneity and self-selection bias.