Information content of private equity investments decision in indian listed firms

Abstract

Capital is important resource for any business and whenever businesses required it, there are various options available for raising it. For example, companies can raise capital via debt or equity route. Even in equity issue they can go for public issue or choose to place their stocks privately to some selected small number of investors. Later approach is commonly known as private placement. Generally, the investors participating in private placements have large capital to invest like mutual fund, private equity etc. Private placement can happen to any investor, it can be promoter himself making additional investment in the company, another company or corporate group making strategic investment in the company or it can be a private equity firm investing in the firm issuing equity with the expectation of adding substantial value to the company through its management expertise, network and previous experience. We can divide acquirer of private placements into two groups, Private Equity (PE) investors and others or Non Private Equity (Non PE) investors. If the target company is a listed company, then its stock will react to the event of private placement due to information content of such events. Depending on the type of the deal and market expectation related to the deal, market reaction can be positive or negative. The reaction of stock price also depends on the efficiency of stock market in a particular country. More the level of efficiency in the market more accurately the effect of such event can be observed. Event study method has been generally used to check the difference in the market reaction to various events ranging from acquisition to stock splits. Event studies method has been used to test the stock return during the time period of private placement announcement for the PE and Non PE private placements. The study tries to establish whether there is any difference in the market reaction after the announcement of such private placement deals. Private Equity is an important source of funds many firms. Private Equity has witnessed a dramatic growth in the recent years in India. There has been significant growth of local funds at the same time several global players have also entered Indian market. Apart from their financial contribution many of these PE firms add value to the company in terms of providing Strategic and Operation level support. Also, it is believed that, PE firms usually invest in a sector/company where they see tremendous amount of growth opportunities and they believe they can add substantial value to the firm using their expertise. Hence they are believed to have superior stock selection skill. Apart from that they also seem to have superior management skill to turn around the company. Given this information, there exists an expectation that a common investor will welcome investment of PE firms in the equity of a particular firm and overall market reaction to such transaction would be positive. With this background information, our study aims to understand whether PE Investment decision are valued better than investment made by other investor through private placement of equity in Indian listed firms. Since, it would be difficult to get the market reaction for non listed firms our focus would be on the listed firms only. This study will be useful in understanding the important role played by private equity firms in the life cycle of investee companies in terms of value addition. It will also help common investors in making a trading strategy for their investment in equities of such companies.