Pricing of Private Placements of Equity

Abstract

Building on the models of Benveniste & Spindt (1989) and Maksimovic & Pichler (2006), the present paper examines the optimal pricing and allocation mechanism for private placements of equity. Our model shows that for firms that receive favorable information prior to private placements, both the information acquisition cost and the value of information affect the offer discount. However, for firms that receive unfavorable information, only the information acquisition cost is the driving force behind the discount. We also show that the value of information has a greater impact on the discount level in private offerings compared to public offerings. However, the information acquisition cost has a greater effect on the discount in public offerings than in private placements.