A Theory of Private vs. Public Placements in Public Firms

40 Pages Posted: 16 Mar 2009 Last revised: 19 Mar 2012

Marc Martos-Vila

London Business School - Department of Finance; University of California, Los Angeles (UCLA) - Finance Area

Date Written: August 1, 2011


This paper studies a public firm's investment decision and whether to raise the equity capital needed using the public market (SEO, Secondary Equity Offering) or a private channel (PIPE, Private Investment in Public Equity). Issuing a PIPE allows the firm to enjoy more financial flexibility. This is modeled in two dimensions: First, funds can be raised faster. Second, dilution costs caused by asymmetric information can be alleviated endogenously. However PIPEs are costly because new shares are temporarily illiquid. The model explains what firms use one market or the other and the optimal timing of investments to better use financial flexibility. For instance, market illiquidity makes the firm less likely to issue a PIPE, asymmetric information makes it more likely. The paper then considers private debt contracts and shows that the pecking order need not hold. The model explains empirical regularities, for instance, why do SEOs have negative abnormal returns around its announcement whereas abnormal returns for PIPEs are positive.

Keywords: Asymmetric Information, Financial Flexibility, Investment, Liquidity, Private Investment in Public Equity, Seasoned Equity Offering

JEL Classification: G30, G31, G32

Suggested Citation

Martos-Vila, Marc, A Theory of Private vs. Public Placements in Public Firms (August 1, 2011). Available at SSRN: https://ssrn.com/abstract=1360389 or http://dx.doi.org/10.2139/ssrn.1360389

Marc Martos-Vila (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States

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