Market timing in private equity placements: Empirical evidence from China

This paper examines the motivation for private equity placements (PEPs) of listed firms in China. We find that private placement firms are overvalued more than their non-issuing counterparts at announcement and issuance. The result is robust to various measures of mispricing. Additional analyses suggest that the stock prices of private placement firms outperform in the pre-announcement period and underperform in the post-issue period. Considering the widespread practice of discounting privately placed shares, overvaluation over the issuance process helps decrease discounts while increasing the PEPs' attractiveness for investors. Through successful market timing, the shares of private placement firms can be offered at overvalued prices even after considering discounts. Overall, these findings suggest that firms use private equity placements to time the market.