Roles of non-institutional investors in private placements

Abstract

I study the announcement returns and the post-placement performance by looking at the identities of investors in the private placements. I find that the participations of individual investors and the management are crucial and associated with significant positive announcement returns of 3.5% and 6.3% respectively, after controlling the firm characteristics and placement terms. Portfolios forming according to the participations of the individual investors and the management generate significant positive weekly alphas of 0.25% and 0.34% respectively, which is equivalent to 13.9% and 19.3% annually. The effects are consistent for the announcement returns and post-placement performance, under the explanation of monitoring hypothesis and certification hypothesis. The findings suggest that the non-ins6tu6onal investors are better informed and their participations provide better certification effects on the stock price. Management participation further improves the post-placement performance by reducing the agency cost. Participation of individual investors improves the post-placement performance by better monitoring, with mere participation of other institutional investors. I also find that the number of institutional investors participated in the placements has a negative effect on the announcement returns, suggesting the increase in the number associates with little certification and hinders the monitoring by creating a free-rider problem. All the results are robust to the choice of estimation models.