Private Placements And Wealth Constraints Of Owner-Managers
Speaker(s) Prof. V Ravi Anshuman, IIMB Publication CAFRAL Conference room on Mezzanine Floor, Main Building. Reserve Bank of India, Fort, Mumbai 400 001
ABSTRACT

We present an asymmetric information model of private placements of equity to owner-managers and institutional investors. The investment-financing decision depends on the interaction between asymmetric information held by owner-managers and their wealth constraints. Our model shows that such private placements can mitigate, if not entirely eliminate, the underinvestment problem. Using a sample of 1064 preferential allotments issued in the Indian capital markets during 2001-2017, we find that announcement period returns are (1) positive, (2) higher for pure owner-manager preferential allotments, (3) unrelated to pre-announcement insider ownership, (4) negatively related to market capitalization, (5) negatively related to volatility of returns and (6) dependent on regulatory constraints that determine the issue price.