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Differential Shareholder Wealth Effects of Private Equity Placements in New Zealand

The New Zealand market allows us to explore the effect of a less restrictive private placement regulatory environment compared to the US and other countries where private placements have already been examined. Examples include no resale restrictions on shares purchased through private placements and no restriction on discount size. We find a strong positive relationship between abnormal announcement returns and the price at which shares are placed, suggesting that placement price conveys important information regarding firm quality and value. Private placements issued at a premium exhibit a permanent positive impact on firm value. In contrast, those placed at a discount experience negative announcement returns and show a significant run-down in returns following the announcement. We also find evidence that purchasers of discounted private placements may be taking advantage of relatively weak regulations governing private placements in New Zealand by immediately selling the new shares for a profit.