Does shareholder coordination matter? Evidence from private placements

We propose a new role for private investments in public equity (PIPEs) as a mechanism to reduce coordination frictions among existing equity holders. We establish a causal link between the coordination ability of incumbent shareholders and PIPE issuance. This result obtains even after controlling fo...

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Bibliographic Details
Published in:Journal of financial economics 2013-04, Vol.108 (1), p.213-230
Main Authors: Chakraborty, Indraneel, Gantchev, Nickolay
Format: Article
Language:English
Subjects:
Asymmetric information
Causality
Coordination
Debt management
Debt renegotiation
Equity
Equity issuance
Financial economics
Firm distress
Investment
Investment policy
Private placement
Private placements
Shareholder coordination
Stockholders
Studies
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Summary:We propose a new role for private investments in public equity (PIPEs) as a mechanism to reduce coordination frictions among existing equity holders. We establish a causal link between the coordination ability of incumbent shareholders and PIPE issuance. This result obtains even after controlling for alternative explanations such as information asymmetry and access to public markets. Improved equity coordination following a private placement leads to favorable debt renegotiations within one year of issuance. Mitigating coordination frictions among shareholders ultimately decreases the odds of firm default in half.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2012.10.001