Three Essays on Private Market Interactions

Download or read book Three Essays on Private Market Interactions written by Jonathan Alexander Daigle and published by . This book was released on 2017 with total page 322 pages. Available in PDF, EPUB and Kindle. Book excerpt: he first study addresses why insurers, whom traditionally invest in relatively safe assets, choose to invest in private equity (PE). Using insurer financial disclosures, we test theories relating how risk shifting, managerial discretion, underinvestment, asset liability matching, regulation, home bias, and reaching for yield affect PE investment. Results indicate risk¬ shifting and managerial discretion by stock insurers does not factor into the PE investment decision. In addition, results confirm home bias positively influences PE investment while underinvestment, asset liability matching, and regulation deter PE investment. Finally, insurers have not increased their PE allocation due to low-yield interest rate environments. The second study directly tests the economies of scope hypothesis of Gao, Ritter, and Zhu (2013) using the data envelopment analysis (DEA) methodology of Demerjian et al. (2012, 2013). I find private firms with less than $50 million in sales are more likely to be acquired than to offer an IPO when their industry has high economies of scope. I do not find evidence that 3-year buy-and-hold returns for IPOs are associated with economies of scope levels. I also find economies of scope are negatively related to firms adopting a dual tracking strategy, but does not explain sell-out premiums for acquired private firms. The third study examines whether private IPOs (PIPOs) decrease information asymmetry in firms that eventually engage in an IPO. Theoretically, PIPOs can mitigate problems of adverse selection and moral hazard because private investments can signal undervaluation and potentially provide more effective monitoring. Consequently, firms with larger, more recent, and frequent PIPOs should experience less underpricing and post IPO volatility relative to other IPOs due to increased monitoring, lower signal attenuation, and positive feedback with existing investor buy ins, respectively. Results indicate the percentage of PIPO investment compared to total equity at IPO is negatively associated with underpricing, thus suggesting PIPOs decrease information asymmetry. However, the longer the amount of time between the last PIPO and the IPO and the total number of PIPOs are positively related to underpricing.