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Long-run underperformance following private equity placements: The role of growth opportunities

De-Wai Chou, Michael Gombola and Feng-Ying Liu

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 3, 1113-1128

Abstract: Our results show that the post-offering performance of private equity issuers is related to growth opportunities. We find significant long-run underperformance in stock returns following private placements only for firms with high Tobin's q. High-q firms experience not only poor stock price performance but also poor operating performance. Low-q firms, in contrast, do not display significant stock price or operating underperformance. We further examine three potential explanations for this relation: over-investment in assets by managers, investor skewness preference, and over-optimism about earnings prospects. Our results are consistent with the view that investors are overly optimistic about the prospects of high growth firms.

Keywords: Private; placements; Long-run; performance; Growth; opportunities (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:1113-1128