IDEAS home Printed from https://ideas.repec.org/p/hhs/luwick/2013_007.html
   My bibliography  Save this paper

Financial Contracts in PIPE Offerings: The Role of Expert Placement Agents

Author

Abstract

PIPEs are an important source of financing for many companies, yet controversial due to their harsh contractual structures. We present a detailedstudy of how PIPE contracts allocate contingent cash flow rights between investor and issuer. We study the role of placement agents in PIPE contract designs. We find that issuers advised by high-ranking “expert” agents agree to more investor-friendly contract terms than issuers advised by low-ranking“non-expert” agents. This result cannot be explained by endogenous matching because expert agents match with larger and higher quality issuers, which have less investor-friendly contract terms. Instead, this result is can be explained by the argument that expert agents help their issuer-clients understand the payoff consequences of negotiable terms. As more direct evidence of this agent role, we show that issuers who share the same placement agent use similar levels of investor-friendly terms. Moreover, we find that expert agents allow issuers to negotiate more attractive pricing when they agree to investor-friendly terms. We finally derive higher post-offering stock returns when the issuer has an expert agent or agrees to more investor-friendly terms. Overall, these results suggest that the involvement of expert placement agents is beneficial to PIPE issuers.

Suggested Citation

  • Bengtsson, Ola & Dai, Na, 2013. "Financial Contracts in PIPE Offerings: The Role of Expert Placement Agents," Knut Wicksell Working Paper Series 2013/7, Lund University, Knut Wicksell Centre for Financial Studies.
    • Handle: RePEc:hhs:luwick:2013_007
    as

    Download full text from publisher

    File URL: http://www.lusem.lu.se/media/kwc/working-papers/kwc-wp-2013-7.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-294, March.
    2. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    3. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    4. Ljungqvist, Alexander P. & Wilhelm, William Jr., 2002. "IPO allocations: discriminatory or discretionary?," Journal of Financial Economics, Elsevier, vol. 65(2), pages 167-201, August.
    5. Na Dai & Hoje Jo & John D. Schatzberg, 2010. "The Quality and Price of Investment Banks’ Service: Evidence from the PIPE Market," Financial Management, Financial Management Association International, vol. 39(2), pages 585-612, June.
    6. Alexander Ljungqvist & Felicia Marston & William J. Wilhelm, 2006. "Competing for Securities Underwriting Mandates: Banking Relationships and Analyst Recommendations," Journal of Finance, American Finance Association, vol. 61(1), pages 301-340, February.
    7. How, Janice C Y & Howe, John S, 2001. "Warrants in Initial Public Offerings: Empirical Evidence," The Journal of Business, University of Chicago Press, vol. 74(3), pages 433-457, July.
    8. Susan Chaplinsky, 2010. "Financing under Extreme Risk: Contract Terms and Returns to Private Investments in Public Equity," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2789-2820, July.
    9. Chitru S. Fernando & Vladimir A. Gatchev & Paul A. Spindt, 2005. "Wanna Dance? How Firms and Underwriters Choose Each Other," Journal of Finance, American Finance Association, vol. 60(5), pages 2437-2469, October.
    10. Chemmanur, Thomas J. & Fulghieri, Paolo, 1997. "Why Include Warrants in New Equity Issues? A Theory of Unit IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(1), pages 1-24, March.
    11. Beatty, Randolph P & Welch, Ivo, 1996. "Issuer Expenses and Legal Liability in Initial Public Offerings," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 545-602, October.
    12. Lily Hua Fang, 2005. "Investment Bank Reputation and the Price and Quality of Underwriting Services," Journal of Finance, American Finance Association, vol. 60(6), pages 2729-2761, December.
    13. Logue, Dennis E & Rogalski, Richard J & Seward, James K & Foster-Johnson, Lynn, 2002. "What Is Special about the Roles of Underwriter Reputation and Market Activities in Initial Public Offerings?," The Journal of Business, University of Chicago Press, vol. 75(2), pages 213-243, April.
    14. Richard B. Carter & Frederick H. Dark & Ajai K. Singh, 1998. "Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks," Journal of Finance, American Finance Association, vol. 53(1), pages 285-311, February.
    15. Schultz, Paul, 1993. "Unit initial public offerings *1: A form of staged financing," Journal of Financial Economics, Elsevier, vol. 34(2), pages 199-229, October.
    16. Booth, James R. & Smith, Richard II, 1986. "Capital raising, underwriting and the certification hypothesis," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 261-281.
    17. Michael Hertzel & Michael Lemmon & James S. Linck & Lynn Rees, 2002. "Long‐Run Performance following Private Placements of Equity," Journal of Finance, American Finance Association, vol. 57(6), pages 2595-2617, December.
    18. Bengtsson, Ola & Sensoy, Berk A., 2011. "Investor abilities and financial contracting: Evidence from venture capital," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 477-502, October.
    19. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 118(1), pages 107-156.
    20. Carter, Richard B & Manaster, Steven, 1990. "Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    21. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    22. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    23. McDonald, J G & Fisher, A K, 1972. "New Issue Stock Price Behavior," Journal of Finance, American Finance Association, vol. 27(1), pages 97-102, March.
    24. Hillion, Pierre & Vermaelen, Theo, 2004. "Death spiral convertibles," Journal of Financial Economics, Elsevier, vol. 71(2), pages 381-415, February.
    25. Megginson, William L & Weiss, Kathleen A, 1991. "Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    26. Ola Bengtsson, 2011. "Covenants in Venture Capital Contracts," Management Science, INFORMS, vol. 57(11), pages 1926-1943, November.
    27. Jacqueline L. Garner & Beverly B. Marshall, 2005. "Unit IPOs: What the Warrant Characteristics Reveal about the Issuing Firm," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1837-1858, September.
    28. Jain, Bharat A., 1994. "The underpricing of 'unit' initial public offerings," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(3), pages 309-325.
    29. David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2009. "Hedge Funds as Investors of Last Resort?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 541-574, February.
    30. Byoun, Soku & Moore, William T., 2003. "Stock vs. stock-warrant units: evidence from seasoned offerings," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 575-590, November.
    31. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    32. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
    33. Chen, Hsuan-Chi & Dai, Na & Schatzberg, John D., 2010. "The choice of equity selling mechanisms: PIPEs versus SEOs," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 104-119, February.
    34. Datta, Sudip & Iskandar-Datta, Mai & Patel, Ajay, 1997. "The Pricing of Initial Public Offers of Corporate Straight Debt," Journal of Finance, American Finance Association, vol. 52(1), pages 379-396, March.
    35. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
    36. Steven N. Kaplan & Per Strömberg, 2004. "Characteristics, Contracts, and Actions: Evidence from Venture Capitalist Analyses," Journal of Finance, American Finance Association, vol. 59(5), pages 2177-2210, October.
    37. Dai, Na, 2007. "Does investor identity matter? An empirical examination of investments by venture capital funds and hedge funds in PIPEs," Journal of Corporate Finance, Elsevier, vol. 13(4), pages 538-563, September.
    38. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    39. Miles Livingston & Robert E. Miller, 2000. "Investment Bank Reputation and the Underwriting of Nonconvertible Debt," Financial Management, Financial Management Association, vol. 29(2), Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lin, Jing & An, Yunbi & Yang, Jun & Liang, Yinhe, 2019. "Price inversion and post lock-up period returns on private investments in public equity in China: An interest transfer perspective," Journal of Corporate Finance, Elsevier, vol. 54(C), pages 47-84.
    2. Bengtsson, Ola & Dai, Na & Henson, Clifford, 2014. "SEC enforcement in the PIPE market: Actions and consequences," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 213-231.
    3. Dai, Na, 2011. "Monitoring via staging: Evidence from Private investments in public equity," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3417-3431.
    4. Hsu, Ching-Yu & Chen, Sheng-Syan & Huang, Chia-Wei, 2021. "Board independence and PIPE offerings," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 478-500.
    5. Jia, Gang & Li, Wanli & Zhang, He, 2019. "Impact of entrenched ultimate owners’ self-dealing on SEO methods choice and discounts of private placements––Evidence from listed companies in China," Emerging Markets Review, Elsevier, vol. 38(C), pages 404-422.
    6. Onur Bayar & Yini Liu & Juan Mao, 2021. "How reverse merger firms raise capital in PIPEs: search costs and placement agent reputation," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 143-184, January.
    7. Dahiya, Sandeep & Klapper, Leora & Parthasarathy, Harini & Singer, Dorothe, 2017. "Equity raising by Asian firms: Choosing between PIPEs and SEOs," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 64-83.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fernando, Chitru S. & Gatchev, Vladimir A. & May, Anthony D. & Megginson, William L., 2015. "Prestige without purpose? Reputation, differentiation, and pricing in U.S. equity underwriting," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 41-63.
    2. Onur Bayar & Yini Liu & Juan Mao, 2021. "How reverse merger firms raise capital in PIPEs: search costs and placement agent reputation," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 143-184, January.
    3. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2017. "Do banks and industrial companies have equal access to reputable underwriters in debt markets?," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 176-202.
    4. Na Dai & Hoje Jo & John D. Schatzberg, 2010. "The Quality and Price of Investment Banks’ Service: Evidence from the PIPE Market," Financial Management, Financial Management Association International, vol. 39(2), pages 585-612, June.
    5. Su, Chen & Brookfield, David, 2013. "An evaluation of the impact of stock market reforms on IPO under-pricing in China: The certification role of underwriters," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 20-33.
    6. Jeppsson, Hans, 2018. "Initial public offerings, subscription precommitments and venture capital participation," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 650-668.
    7. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2020. "Do bank bailouts have an impact on the underwriting business?," Journal of Financial Stability, Elsevier, vol. 49(C).
    8. Na-Youn Kim, 2019. "Do Reputable Underwriters Affect the Sustainability of Newly Listed Firms? Evidence from South Korea," Sustainability, MDPI, vol. 11(9), pages 1-19, May.
    9. Su, Chen, 2015. "Does institutional reform improve the impact of investment bank reputation on the long-term stock performance of initial public offerings?," The British Accounting Review, Elsevier, vol. 47(4), pages 445-470.
    10. Tiziana La Rocca, 2021. "Do prestigious underwriters shape IPO pricing? A meta-analytic review," Review of Managerial Science, Springer, vol. 15(3), pages 573-609, April.
    11. Trauten, Andreas, 2004. "Zur Effizienz von Wertpapieremissionen über Internetplattformen," Working Papers 8, University of Münster, Competence Center Internet Economy and Hybrid Systems, European Research Center for Information Systems (ERCIS).
    12. Manconi, Alberto & Neretina, Ekaterina & Renneboog, Luc, 2018. "Underwriter Competition and Bargaining Power in the Corporate Bond Market," Discussion Paper 2018-034, Tilburg University, Center for Economic Research.
    13. Carter, Richard B. & Dark, Frederick H. & Sapp, Travis R.A., 2010. "Underwriter reputation and IPO issuer alignment 1981-2005," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 443-455, November.
    14. Andre Guettler & Ulrich Hommel & Julia Reichert, 2011. "The influence of sponsor, servicer, and underwriter characteristics on RMBS performance," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 25(3), pages 281-311, September.
    15. Su, Chen & Bangassa, Kenbata, 2011. "The impact of underwriter reputation on initial returns and long-run performance of Chinese IPOs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 760-791.
    16. Dang, Man & Puwanenthiren, Premkanth & Truong, Cameron & Henry, Darren & Vo, Xuan Vinh, 2022. "Audit quality and seasoned equity offerings methods," International Review of Financial Analysis, Elsevier, vol. 83(C).
    17. Andrew J. Leone & Steve Rock & Michael Willenborg, 2007. "Disclosure of Intended Use of Proceeds and Underpricing in Initial Public Offerings," Journal of Accounting Research, Wiley Blackwell, vol. 45(1), pages 111-153, March.
    18. Wei Luo & Pingui Rao & Heng Yue, 2010. "Information Risk and Underwriter Switching in SEOs: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7‐8), pages 905-928, July.
    19. Wei Luo & Pingui Rao & Heng Yue, 2010. "Information Risk and Underwriter Switching in SEOs: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(7-8), pages 905-928.
    20. Carbó-Valverde, Santiago & Cuadros-Solas, Pedro J. & Rodríguez-Fernández, Francisco, 2021. "The impact of lending relationships on the choice and structure of bond underwriting syndicates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).

    More about this item

    Keywords

    Financial Contracting; Equity Offerings; Placement Agents; Hedge funds;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:luwick:2013_007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jens Forssbaeck or Frederik Lundtofte (email available below). General contact details of provider: https://edirc.repec.org/data/kwcluse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.