Why Do Insiders Sometimes Pay More and Sometimes Pay Less in Private Placements?

Abstract

This paper explores private placement pricing sold to insiders by considering changes in the control power of the largest shareholders in private placement. We use the Banzhaf power index to reflect the largest shareholder’s relative power of influence. The results indicate that, if existing insiders maintain their leading control status, in cases where insiders are the main investors, private placements are issued at deep discounts that benefit themselves. However, in cases where outsiders/new insiders are the main investors, outsiders and new insiders will pay relatively more when existing insiders dominate. Contrarily, if existing insiders fail to retain their leading position and become less powerful after private placement, outsiders and new insiders buy at lower prices. In more than 65% of the sample, the largest shareholders lost their leading control status, and the issuer’s ownership structure becomes more concentrated following private placements. Finally, the findings suggest that motivations of private placement issues have a greater influence on pricing than investor types in private placements.

Keywords: Private placement discount, power index, control right, self-dealing, ownership structure

JEL Classification: G1, G3