Information asymmetry and monitoring in equity private placements

• We examine factors that determine price discounts and announcement effects of private placements.
• We explore the different influential factors between exchange-listed firms and OTC firms.
• The results in OTC firms corroborate the information hypothesis.
• The results for exchange-listed firms support the information explanation and the monitoring explanation.

This paper systematically examines the factors that determine price discounts and announcement effects of equity private placements conducted by firms in Taiwan from 2002 to 2008. Different with most studies of private placements using available observations as a whole sample, our study separates the whole sample into subsamples by exchange-listed firms and OTC firms. The results for OTC firms corroborate the information hypothesis; the discounts serve as compensation for investor's costs of assessing firms, while abnormal returns reflect the information about firm quality. On the other hand, the empirical results show that some of our findings support an information explanation and some support a monitoring explanation in the case of exchange-listed firms. It seems that there are different motives behind the exchange-listed firms placing equity privately.