The Announcement Effect and Long Run Performance of Equity Private Placement in Malaysia

This study offers evidence concerning the announcement effect and long run performance of equity private placements in Malaysia for the period 1999 to 2007. Unlike public placements, previous studies document positive announcement effect but negative long run performance for private placements. Monitoring hypothesis and information hypothesis are two prevailing hypotheses that have been used to explain the positive announcement effect; while “windows of opportunity”, managerial entrenchment, and investors’ overoptimisms are used to explain the poor long run performance. Malaysian firms are governed by different regulations; therefore, the impact of issuing private placements might not be the same for Malaysian market. For example, issuance of private placement in Malaysia is limited to 10 percent of the firm’s issued and paid up capital with not more than two percent can be placed to one placee. With only two percent of shares, the investor will not be able to influence management behavior through his or her voting power and becomes a passive investor. As a result of this, equity private placements in Malaysia might not increase monitoring as claimed by previous studies but instead solidify the managers’ and substantial shareholders’ control over the firm. This study fills the gap in current literature by investigating the impact of equity private placements in Malaysia using event study methodology to examine the announcement effect; while CAR and BHAR methods are used to examine the long run performance. Inconsistent with previous studies, zero announcement effect is found for Malaysian market. Nevertheless, similar to previous studies, the result reveals an evidence of long run underperformance of equity private placements in Malaysia using market index as a benchmark. In general, the results of this study contribute to the existing literature by providing evidence that equity private placement in Malaysia does not support monitoring hypothesis and information (certification) hypothesis.