5-1 - Alternative Econometric Methods for Information-based...

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Unformatted text preview: Alternative Econometric Methods for Information-based Equity-selling Mechanisms Lee Cheng-Few and YiLin Wu a Department of Finance and Economics, School of Business, Rutgers University, Piscataway, New Jersey, 08854-8054, USA, Tel: 732-4453907, Fax: 732-4455927, E-mail: lee@rbs.rutgers.edu b Department of Quantitative Finance, College of Technology Management, National Tsing Hua University, Hsinchu, Taiwan 30013, R.O.C., Tel:886- 035742225, Fax: 886-035742225, E-mail: yilinwu@mx.nthu.edu.tw Abstract Extant research offers mixed empirical results on the information content of private placements. Hertzel and Smith (1993) suggest that, on average, private placement &rms are undervalued. On the other hand, Hertzel, Lemmon, Linck, and Rees (2002) show that private placement &rms experience signi&cant negative long-run post-announcement stock price performance and that high levels of capital expenditures around private placement reect managerial overoptimism. Empirical work ex- amining the information content of private placements typically takes the approach based on proxies for information asymmetry that suffers the intrinsic errors-in-variables problem. This paper circum- vents the empirical dif&culty by developing the two-stage estimation approach and the conditional correlation approach. The conditional correlation coef&cient varies between -1 and +1 that allows comparisons across samples feasible. Thus, it prevails over the two-stage estimation approach to identify the signi&cance of the information content of equity-selling mechanisms. Corresponding author contact information: Department of Quantitative Finance, College of Technology Management, National Tsing Hua University. E-mail: yilinwu@mx.nthu.edu.tw 1 1 Introduction One important connection between asymmetric information and undervaluation in the area of corpo- rate &nance is the choice of equity-selling mechanisms. The fundamental implication of asymmetric information on the choice of equity-selling mechanisms is that &rms issuing private (public) offerings will be on average undervalued (overvalued) (Myers and Majluf (1984), Hertzel and Smith (1993)). If &rms are undervalued such that issuing equity to the public investors will dilute value of the exist- ing shareholders, then &rms may choose not to issue equity publicly and instead resort to the private placement market so as to convey their favorable private information to sophisticated (accredited) investors in the negotiation process. In this framework, the decision to go to the private placement market conveys that the &rms are undervalued. On the other hand, the extant behavioral &nance liter- ature suggests that private placements reect managers overcon&dence on the future &rm prospects (Hertzel, Lemmon, Linck, and Rees (2002)) or that private placement &rms correctly anticipate naive investors misvaluation and take advantage of the capital market conditions (Huson, Malatesta, and Parrino (2006))....
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5-1 - Alternative Econometric Methods for Information-based...

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