The Determinants of Private Placement Discounts and Announcement Effects : Insights from the Stockholm Stock Exchange

Abstract: This study examines the determinants of private placement discounts and announcement effects on the Stockholm Stock Exchange between 2014 and 2022. The results show that private placement announcement effects are significantly positive, reinforcing the empirical support for the monitoring hypothesis and information hypotheses. Positive announcement effects reflect signals of certification from private equity investors that the firm is undervalued. Regression analysis suggests that information costs and some firm characteristics are important determinants for discounts on private placements. Private equity investors will demand larger discounts when information asymmetry is high, and cash flow restraints are more severe. Foreign investors require significantly smaller discounts on private placements, possibly implying that they commonly assume a passive rather than active role as shareholders. Firms’ stated motivations for private placements and the agreed discounts are significantly related to stock market reactions. Specifically, motivations relating to an investment in a new project or an acquisition are associated with significantly more positive announcement effects.