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The Return on Private Investment in Public Equity

We examine the long-run performance following traditional private placements by Canadian public firms, to provide an explanation for the common observation that such placements are generally followed by abnormally low returns. We investigate 3,291 Canadian private investments in public equity from 1993 to 2003, and we observe a significant long-run post-issue underperformance using a classic Fama-French Three Factor Pricing Model. Adding an investment risk factor, as in Lyandres, Sun and Zhang (2008), to the calendar-time regressions sharply reduces the abnormal performance. We then take into account the discount and show that the long-run return of private equity investors differs from the shareholders' return and is normal on average. In a third step, we split the sample according to the glamour value dimension and according to the firms' investment activity. Only glamour firms with high investment activity are found to underperform in the long run. The underperformance appears to be driven by a subset of firms. Private investors obtain positive returns following private placements, if they invest in value and low investment firms. This supports the hypothesis that private investors correctly assess investment projects of value firms, while they tend to systematically overestimate investment projects of glamour firms that issue equity.
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