Signaling through private equity placements and its impact on the valuation of biotechnology firms

This paper investigates how young, publicly held technology firms contend with information asymmetry, and the hazards it introduces, to acquire the capital necessary for future growth. We ascribe to the view that firms issuing private equity signal the marketplace that managers believe their growth opportunities are undervalued. Consistent with this view, we find significant positive abnormal returns to announcements of private equity placements. We develop theory suggesting that returns are determined by the timing of previous signals. We also argue that the characteristics of the private placement signal, specifically whether private equity is bundled with research partnerships, influence the strength of the signal. Our results largely support our expectations. (C) 2002 Elsevier Science Inc. All rights reserved.