Long-Run Stock Returns and Abnormal Accruals of Private Issuers: Are They Different from Public Issuers?

Abstract

This study simultaneously examines long-run stock returns and abnormal accruals of private placements of common stock, convertible debt and straight debt. We investigate patterns surrounding private placements and compare our results to predictions of competing hypotheses. We find that the long-term abnormal return for common stock is significantly positive in the year immediately before the private placement but significantly negative in the post periods. The abnormal return is significantly negative for convertible debt in the year immediately following the private placement. Our results are more consistent with the last-resort financing hypothesis rather than the overvaluation hypothesis, which is often used to explain the performance of public issuers.