Choice between rights issue and private placements of equity and the role of information asymmetry

PurposeThe objective of this paper is to investigate the role of information asymmetry in the equity selling mechanisms chosen by the firms from an important emerging market, India. Specifically, the authors look into the choice between the two most popular mechanisms of equity issues – rights issue and private placement of equity.Design/methodology/approachThis study introduces three analyst specific variables as proxies of information asymmetry as the conventional proxies are fraught with several disadvantages. First, the paper tests the choice between rights issue and private placement using a binary logistic model. In the second approach the authors use rights issue and segregate the private placements into preferential allotments and qualified institutional placements and test the impact of information asymmetry using a multinomial logistic regression.FindingsThe outcome of this empirical exercise shows that only those firms facing lesser information problems choose rights issue of equity. Private placements are chosen by firms facing higher information problems to circumvent information costs. The results remain invariant even after segregating the qualified institutional placements from private equity placement as the firms with information disadvantage choose to place equity privately.Originality/valueIn contrast to the conventional studies that focus on the debt-equity framework, the authors argue that the impact of information asymmetry is applicable even at disaggregated levels of equity selling mechanism.

Customer relationship and the operating performance following private placements

Purpose Close relationship with major customers, by curtailing opportunistic behaviors during private placements (PPs) and guaranteeing the production and sales of products after, is expected to facilitate the realization of PP’s strategic goals. However, major customers, on the contrary, may impair PP’s performance because of their strong bargaining power. Based on the transaction cost theory and relational contract theory, this paper aims to investigate the impact of major customers on firms’ strategic development in the context of private placements. The mechanisms of such impact are analyzed from the prospect of economies of scale, supervision and the rip-off effect by major customers. Further, the moderating role of the customer relationship investment (CRI) is considered. Design/methodology/approach Using a sample of China’s non-financial A-share listed firms during 2010-2016, this paper empirically investigates the impact of customer relationships on firms’ operating performance following PPs. In the main regressions, the sales growth rate serves as the dependent variable to measure PP’s operating performance, while the customer concentration proxies for the closeness of customer relationship. This study captures the impact of customer relationships on PPs’ performance by looking at the coefficient of the interaction term of post PP dummy and customer concentration. In the additional tests, selling and management expenses along with entertainment and traveling expenditures are used to measure customer relationship investment. Findings Results show that major customers help improve PPs’ strategic performance. The more concentrated the customer portfolio is, the higher operating performance will be after the PPs. Such a relationship is stronger when CRI is at a higher level. However, CRI also incurs costs, which impairs the effect of major customers on net profit. Further research finds that the effect of major customers is more pronounced in situations of extensional PPs, with actively interactive customers and in non-state-owned firms. In addition, state-owned customers with strong bargaining power have impaired the role of customers in promoting PP’s operating performance. Originality/value This paper validates the role of customers in firms’ strategic development. The study not only contributes to the research on the economic consequences of customers but also adds to the evolving literature of factors affecting the performance of PPs. The findings of the study have important practical implications for both customer relationship management and the supervision of PPs.

Investing Productively: The Securities Market

Relative to labor, capital is India’s scarce factor of production. Therefore, it is particularly important that it is allocated to the most productive activities. Well-functioning financial markets are critical to achieving this objective. Accordingly, this chapter focuses on the securities markets in India. In terms of new issues, private placements have dominated securities markets in India, both in equity and in debt. When it comes to public placements, while there is a bit of liquidity in equities, the same is not the case in the debt market. The market in publicly traded corporate bonds is thin, with limited liquidity. This chapter offers a number of ideas to deepen this market. For instance, rules governing investment in these bonds by pension, provident, and insurance funds may be liberalized. The government may also partially de-risk long-term bonds for infrastructure projects through provision of collateral.

Private Placements of Equity and Firm Value: Value Enhancing or Value Destroying?

This paper reassesses two conflicting hypotheses on the valuation impacts of private placements of equity (PPEs), the monitoring/certification hypothesis and the managerial entrenchment hypothesis, by focusing on the shareholder approval, active buyer, and premium pricing features of PPEs. We find that PPEs with these features have significant positive announcement returns and insignificant mean long-run returns, while the corresponding announcement and long-run returns for PPEs without such features are significantly negative. Firms with value-enhancing PPE features are better governed and use proceeds more efficiently. Thus, the heterogeneous nature of PPEs helps reconcile the puzzling return patterns and conflicting hypotheses regarding PPEs.