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

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.

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Paper provided by Knut Wicksell Centre for Financial Studies, Lund University in its series Knut Wicksell Working Paper Series with number 2013/7.

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Length: 60 pages
Date of creation: 23 Apr 2013
Date of revision:
Handle: RePEc:hhs:luwick:2013_007
Contact details of provider: Postal: Knut Wicksell Centre for Financial Studies, Lund University School of Economics and Management, P.O. Box 7080, S-220 07 Lund, Sweden
Phone: +46 46-222 32 61
Fax: +46 46-222 34 06
Web page: http://www.lusem.lu.se/kwc

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