Public issue of equityPrivate placement of equity Prior operating performance positivenegative Post operating performance negative Short-term reaction negativepositive Prior price run-up and M/B Positive / high Pre/ post R&D and CE increase Long-term reaction negativeMore negative Explanation1. Window opportunity: Take window of opportunity to issue overvalued share 2. Over-optimism: Investors / managers are too optimistic about firm’s prospect 3. Under-reaction hypothesis: Investors under- react to the information conveyed in the announcement. 4. Behavior finance: Investors overweight recent experience at the expense of long-term averages. no Yes no Opposite (price discount reflects private investor’s assessment)

Long-rum performance following private placement of equity From table1, control industry, size, and B/M Discount-adjusted abnormal return? Long-term AR: Buy-and-hold benchmark approach 1.A size-matched control firm 2.An industry-and-size-matched control firm 3.A book-to-market-and-size-matched control firm 4.Cross-sectional t-test and Bootstrapping test (see appendix) Long-term AR: Calendar-time portfolio approach 1.Why? Because of potential cross-sectional dependence in returns 2.Regression intercept and adjusted intercept

Long-rum performance following private placement of equity Negative long-term AR hold for different firm sizes, different B/M, newly issued forms or not, different industries, and price discount or premium The correlation between short-term AR and long-term AR is insignificant. Under-reaction hypothesis would predict positive correlation! Operating performance, industry-adjusted or industry-size- operating performance-adjusted, is negative from t-3 to t+3. Results are not driven by new issue effect. Positive prior price run-up from t-2 or t-1 to t and higher M/B, coupled with higher R&D and CE, suggest that investors and managers are over-optimistic about the future payoff from firm’s current investment and growth opportunity but are disappointed when performance does not improve after the issue.

Long-rum performance following private placement of equity