Signaling through private equity placements and its impact on the valuation of biotechnology firms Jay J. Janney a,1,2 , Timothy B. Folta b, * a University of Dayton, 300 College Park, Dayton, OH 45469-2271, USA b Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, USA Received 1 January 2001; received in revised form 1 May 2001; accepted 1 May 2002 Abstract 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. D 2002 Elsevier Science Inc. All rights reserved. Keywords: Private equity; Information asymmetry; Signaling 1. Executive summary Young firms compete not only on the basis of the ideas they generate, but also on their ability to attract resources that allow them to commercialize their ideas. Such competition is characterized by the need to overcome hurdles arising from concerns of information asymmetry. One solution is for firms to credibly signal their true value, particularly via the 0883-9026/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved. doi:10.1016/S0883-9026(02)00100-3 * Corresponding author. Tel.: +1-765-494-9252; fax: +1-765-494-9658. E-mail addresses: janney@udayton.edu (J.J. Janney), foltat@mgmt.purdue.edu (T.B. Folta). 1 Tel.: + 1-937-229-2975. 2 Formerly of Purdue University. Journal of Business Venturing 18 (2003) 361–380