Strategic Management Journal Strat. Mgmt. J., 25: 223–242 (2004) Published online 4 November 2003 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.373 STRATEGIC BENEFITS TO FIRMS ISSUING PRIVATE EQUITY PLACEMENTS TIMOTHY B. FOLTA 1 * and JAY. J. JANNEY 2 1 Krannert Graduate School of Management, Purdue University, West Lafayette, Indiana, U.S.A. 2 School of Business Administration, University of Dayton, Dayton, Ohio, U.S.A. For young technology firms, acquiring resources can often be costly due to the information asymmetry and uncertainty that exist surrounding the new technology. We contend that firms able to issue private equity can better manage their ability to mobilize three kinds of resources: capital, research partners, and commercial partners. We investigate the existence of long-term, strategic benefits to private placements, and a number of factors may determine the long-term effectiveness of this governance form. Overall, the empirical analyses demonstrates that private placements provide long-term benefits to firms by reducing hazards associated with information asymmetry. Copyright  2003 John Wiley & Sons, Ltd. Capital is a critical resource for all firms, and its supply is uncertain, particularly when firms are dependent upon external markets. Questions related to the choice of financing have increas- ingly gained importance in strategic management research (Kochhar, 1996), and financing type is thought to influence a firm’s competitive position (Balakrishnan and Fox, 1993). Much of this work has focused on how a firm’s strategy influences its choice between two major types of financ- ing: debt and equity. These financing types can be viewed as alternative ‘governance structures’ (Williamson, 1988) to mitigate concerns between principals and agents (Jensen and Meckling, 1976). Several key concerns influence the financing of technology firms. Assets required for innovative activity are substantially irreversible and/or non- redeployable. While this firm specificity enhances Key words: private equity; information asymmetry; fi- nancing strategy; signaling *Correspondence to: Timothy B. Folta, Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907-1310, U.S.A. E-mail: foltat@mgmt.purdue.edu its uniqueness and competitive advantage, it cre- ates problems in attracting capital. Technology firms have the added problem of being diffi- cult to measure and evaluate. So, transactions involving such assets will be affected by infor- mation asymmetry between insiders and outsiders. Nevertheless, technology firms have an opportu- nity to design and manage governance structures and relationships such that these problems are mitigated. Public firms not only have a choice between debt and equity, but also between private and public equity markets. Since private equity placements are not registered with the Securities Exchange Commission and have resale restrictions, they can only be purchased by ‘certified’ investors. Simi- lar to Williamson’s (1988) characterization of debt and equity as alternative governance structures, a distinction between public and private equity may also represent alternative means to govern transactions. Private equity markets are thought to be superior for governing problems arising from information asymmetry (Wruck, 1989; Hertzel and Smith, 1993). One important implication of proper Copyright  2003 John Wiley & Sons, Ltd. Received 7 June 2000 Final revision received 13 August 2003