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PIPE Dreams? The Performance of Companies Issuing Equity Privately

Author

Listed:
  • David J. Brophy
  • Paige P. Ouimet
  • Clemens Sialm

Abstract

Private Investments in Public Equity (PIPEs) have become an important source of financing for young, publicly traded firms whose poor operating performance may limit alternative financing options. We propose that firms are motivated to sell these securities to minimize costs associated with asymmetric information. We find that both the security structure and the investor composition of a PIPE security matter in the subsequent performance of the issuing firm. Poor post-issuance performance is associated with securities where investors obtain significant repricing rights, which protect them from future stock price declines. Furthermore, companies that obtain financing from hedge funds tend to under-perform companies that obtain financing from other institutional investors. We argue that hedge funds act as investors of last resort, playing an important role in the market for young, high-risk firms with substantial asymmetric information. Hedge funds are willing to fund such high-risk companies because they can protect against possible price declines in the issuing companies by either negotiating PIPE securities with repricing rights or by entering into short positions of the underlying stocks of the issuing companies.

Suggested Citation

  • David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2004. "PIPE Dreams? The Performance of Companies Issuing Equity Privately," NBER Working Papers 11011, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11011
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    References listed on IDEAS

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    Cited by:

    1. Cécile Carpentier & Jean-François L'Her & Stephan Smith & Jean-Marc Suret, 2007. "Risk, Timing and Overoptimism in Private Placements and Public Offerings," CIRANO Working Papers 2007s-27, CIRANO.
    2. John Kwoka, 2008. "Restructuring the U.S. Electric Power Sector: A Review of Recent Studies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(3), pages 165-196, May.
    3. Sengupta, Rajdeep & Black, Lamont K. & Floros , Ioannis, 2016. "Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014," Research Working Paper RWP 16-5, Federal Reserve Bank of Kansas City.
    4. Armando Gomes & Gordon Phillips, 2005. "Why Do Public Firms Issue Private and Public Securities?," NBER Working Papers 11294, National Bureau of Economic Research, Inc.
    5. Cécile Carpentier & Jean-Marc Suret, 2009. "Private Placements by Small Public Entities: Canadian Experience," CIRANO Working Papers 2009s-12, CIRANO.
    6. 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.

    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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