Institutional investors as suppliers of equity-linked capital: Evidence from privately placed convertible debt

Using a sample of firms that privately placed convertible debt with a few institutional buyers during the period 1980 to 1998, we find significantly negative stock and operating performance subsequent to the placements. Yet, our examination of the activities between the placing firm and buyers shows that most institutional buyers remain passive investors after convertible debt placements. Our findings support the “windows of opportunity” hypothesis which suggests that firms issue equity or equity-linked securities when their equity is overpriced. Our findings are not consistent with traditional arguments that private financing arrangements with a limited number of institutional investors allow a firm to avoid the information disparity problems that attend capital-raising endeavors by undervalued or correctly priced firms. Nor are our findings consistent with institutional blockholders formed in a private placement performing a quality certification of the firm or aligning the interest of corporate managers more closely with those of shareholders.