Market reactions to private equity announcements and intra-industry information spillover

Abstract

Purpose

The purpose of this paper is to examine market reactions to private equity placements and intra-industry information spillover effects in the Taiwan Stock Exchange.

Design/methodology/approach

The authors first use the market model to compute the abnormal announcement returns. To examine the joint impact of the private investment in public equity (PIPE) purposes and the lead investor industry, the authors regress the issuers’ cumulative abnormal returns (CARs) on the dummy variables of PIPE purposes and the lead investor industry. To study the spillover effects, the authors regress the rivals’ CARs on the issuers’ CARs, PIPE purposes, and the lead investor industry. Finally, the industry Herfindahl index is used as a proxy for the market power of issuers and rivals to examine its impact on the spillover effects.

Findings

The authors find that issuing firms experience positive abnormal returns during the announcement period. Issuers enjoy more positive market reactions when the proceeds of offerings are primarily used to establish a long-term strategic alliance or to integrate business and when the lead investor is in the same industry. Furthermore, the authors show that the contagion effect dominates the competitive effect in private equity placements at the aggregate level. At the subsample level, the authors find competitive effect overpowers contagion effect when the purpose of offerings is primarily used to establish a long-term strategic alliance or to integrate business and when the lead investor is in the different industry. Finally, the authors show that rivals with relative lower market power enjoy more positive contagion effects.

Originality/value

First, the analysis documents the simultaneous importance of both the purposes of private offerings and the lead investor’s industry on announcement reactions, which shed new light on the positive abnormal returns during the announcement period. Second, the study adds to the literature on the information spillover effects by analyzing the role played by purposes of offerings and rivals’ market power. This paper provides a more complete picture of the offsetting competitive and contagion effects.

Citation

Chen, K.-C., Cheng, L.-Y., Huang, S.-J. and Zhao, Y. (2016), "Market reactions to private equity announcements and intra-industry information spillover", Managerial Finance, Vol. 42 No. 7, pp. 722-742. https://doi.org/10.1108/MF-09-2015-0236