Study Of Institutional Investor’s Information Superiority In Private Placements

Nowadays, financing has become a big headache for listed companies whose demand for capital remains strong in this expanding economy. For one thing, their financing channels have got tighter due to strict financial regulation. For another thing, many constraints must be taken into consideration before financing, like the capital accessibility, the cost of capital and the funding term. Under this circumstance, private placement has been welcomed with open arms by many listed companies because of its prominent advantages like high-efficiency, low-cost and covenant-Lite, since its debut in 2006 with the introduction of Administrative Measures for the Issuance of Securities by Listed Companies.Unlike public offering, securities available for sale through a private placement are only limited to no more than ten investors, which include big shareholders, their affiliated parties, institutional investors and other investors. To better understand how private placement offering process works, this paper analyzes the institutional investors’role in private placement and their information superiority based on theoretical analysis and empirical results.The empirical research of this paper is conducted from three dimensions:the financial data of listed companies before and after the private placement, market reactions in short-to-medium term in the process of private placement and long-term performance after the private placement. It should be mentioned that the data used in this paper are from 2006 to present days since private placement was not available until 2006. From the research, it can be concluded that:institutional investors with their strength in research, can choose the private placement issued by top listed companies; meanwhile, the market recognizes and delivers positive response to the private placement targeted by institutional investors, and will react early for concerns that institutional investors may sell shares on the ban-lifting day. However, institutional investors can not gain abnormal return through private placement, nor can they obtain higher discount. This fact proves that though institutional investors have superiority in explaining public information, they personally have no information superiority.