The stock market reaction to private placement announcements : An empirical study of private placements on the Oslo Stock Exchange during the time period 2012 to 2020

Abstract

During the last decades, private placements have become the preferred approach for issuing equity on the Oslo Stock Exchange (OSE), despite its discriminatory nature. With a sample consisting of 95 events (private placements) across 73 different companies between January 2012 and January 2020, our introductory results show a statistically significant negative stock price reaction to a private placement announcement. This is contrary to former research explaining positive announcement returns with the monitoring and certification hypothesis. Our thesis contributes to the existing literature by primarily exploring two aspects of private placements. In the first part, we investigate whether the announcement returns align with the anticipated price depreciation based on the discount and dilution set in the offering. Any discrepancies between the two must signal other information from the market. We find that for every 1% increase in the implied price depreciation, the issuer on average reports an announcement return of -2.329%. This can be perceived as an indirect cost related to the offering. For the shareholders, and thus, the regulatory body (Oslo Børs), the results are important because they indicate an adverse effect on non-participating shareholders’ returns. In the second part, we test whether the announcement of a subsequent repair issue impacts the issuer announcement returns. Repair issues are, to our knowledge, a Norwegian phenomenon that is not observed in other markets. It aims to compensate non-participating shareholders for the discrimination in the private placement and is deemed as an important element in the approval of the private placement by Oslo Børs. Our results show that when firms announce a private placement without a repair issue, cumulative abnormal return (CAR) is negative. When issuers announce a subsequent repair issue, CAR is negative but 2.68% higher. Indicating that the announcement of a repair issue might have value for all shareholders as it leads to higher announcement returns.