Differential shareholder wealth and volume effects surrounding private equity placements in New Zealand

Private equity placements in New Zealand exhibit a strong positive relationship between abnormal announcement returns and the price at which shares are placed. The relationship suggests that placement price conveys important information regarding firm quality and value. This is significant as the New Zealand market has different regulations governing private equity placements compared to other countries. For example, private placement purchasers in New Zealand can buy shares at substantial discounts and immediately sell on-market without disclosing these trades to the market for a period of at least 5 days. Private placements issued at a premium exhibit a permanent positive impact on firm value. In contrast, those placed at a discount experience negative announcement returns and show a significant run-down in returns following the announcement. Private placements spark a large increase in trading activity in the 5 days following an announcement and the increase is particularly strong for those placed at a discount. We also find that companies that privately place equity in New Zealand are typically low book to market, thinly traded stocks. Therefore, the immediate returns available to purchasers of discounted shares may reflect fair compensation for these risks.