Abstract
- Financial theory describes the demand for liquid resources by the firm and the implications of the accumulation of liquidity on firm value. Various authors hold that firm value is first enhanced as it acquires liquidity to fund profitable investment and later reduced as costly liquid resources are over-accumulated. The primary contribution of this study comes from examining factors associated with liquidity infusions and the consistency of any discoveries with existing theory and prior empirics. To provide this contribution, a sample of equity private placement announcements are examined, where liquidity is provided to the firm and where an observable link exists between the announcements and the factors influencing changes in the firm’s stock price. Significant adjusted and unadjusted positive abnormal returns are discovered over a primary private placement announcement period. Findings are contrary to expectations of adverse market responses to equity issues in general. Results are similar to favorable responses to private placements observed in prior private placement studies. Test evidence confirms that liquidity and changes in liquidity help to describe the cross-section of market responses at private equity placement announcements. Positive market responses are strongly associated with the size of the liquidity enhancement and a negative response, suggested in a broad literature for the initially more liquid firms, does not result for the average announcing firm. Changes in ownership concentration pursuant to the private placement are associated with non-monotonic changes in firm value. Proxies for growth opportunities and firm size are significantly related to these market responses. Overall, announcements are favored for the better-performing smaller and growing firms that are receiving larger liquidity infusions. The market may use recent firm performance and existing levels of liquidity as proxies for survival, as the firms with little or no pre-announcement liquidity suffer negative average market responses to the placement announcements, the market seemingly averse to “throwing good money after bad.”