In recent years, private equity has emerged as an important destination for investments in India. This paper examines the effect of private equity placements on shareholder value, changes in liquidity and changes in ownership structure around the announcement of private equity deals. We find that the Indian stock market reacts positively to private equity transactions. The trading volume decreases after the private equity deal; the number of trades and turnover improve after the deal but market capitalization does not increase. There is also a dilution of promoters’ shareholdings after the deal. An analysis of cross-sectional abnormal returns shows that there is a negative relation between growth opportunities and abnormal returns, confirming that private equity announcements have no impact on the growth opportunities of a firm.

The private equity industry in India is more than 15 years old. There were 206 private equity deals in 2009 with a total value of $3.44 bn. In contrast, there were 312 deals with a value of $10.59 bn in 2008. The largest number of deals took place in 2007, numbering 405 with a value of $19.04 bn. These figures reflect the growing importance of private equity mechanism of raising the much-needed scarce capital resources by companies and the trust of overseas investors in the Indian growth story. Jensen and Meckling (1976) show the agency problem arising out of conflicts of interest between the managers of a firm and the providers of capital—the shareholders. Shliefer and Vishny (1997) show the conflicts of interest between the controlling and non-controlling owners of a firm. Demsetz and Lehn (1985) and Shliefer and Vishny (1986) argue that a private placement creates an outside shareholder who monitors management or contributes expert advice, thereby increasing the value of a firm. This paper examines the effect of private equity placements on shareholder value, changes in liquidity, and changes in ownership structure around the announcement of private equity deals, and thus contributes to the lack of empirical research in India.

Applied Finance Journal, Winter Blues, Stock Market Returns, Tunisian Stock Exchange, Trading Strategies, Stock Market Anomalies, Tunisian Stock Market, OLS Regression Method, Clinical Research, Risk Aversion.