Relationships, corporate governance, and performance: Evidence from private placements of common stock

Karen H. Wruck and YiLin Wu

Journal of Corporate Finance, 2009, vol. 15, issue 1, 30-47

Abstract: Using data from private placement contracts, we analyze relationships between investors and issuers, and their impact on corporate governance and performance. Most investors have a relationship with the issuer pre-placement and many new relationships are formed through the placement agreement. New relationships are largely governance-related (board seats and/or 5% or greater blocks), but also include key business partnerships and/or employment arrangements. We have three main findings. First, new relationships drive the positive stock price response at announcement; placements lacking new relationships are non-events. Second, investors with relationship ties to the issuer are more likely to gain directorships as part of the placement. Third, new relationships are associated with stronger post-placement profitability and stock price performance. Overall, our findings are consistent with private placements creating value when they are associated with increased monitoring and strong governance.

Keywords: Private placement Private equity Equity issuance Relationship investing Relationship investor Agency theory Asymmetric information Entrenchment Specific investment Relationship-specific investment; governance; blockholders Ownership concentration (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:15:y:2009:i:1:p:30-47

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