35 Pages Posted: 8 Dec 2009 Last revised: 18 Aug 2012
Date Written: June 1, 2012
This study examines why private equity issues tend to be a repeated source of financing for public firms. We test the recent operational needs theory of public equity issuance within the context of repeated private equity issues. We find that repeated PIPE issuers burn through cash quickly and do not reach the standards of information transparency or profitability needed for a successful public equity offering. This has implications for investor composition and the market response to a PIPE. Initial PIPE offerings are characterized by substantial diversity in investor type. In successive transactions firms increasingly rely upon hedge funds, who extract greater price discounts and more often require cash flow rights as opposed to control rights. As firms select a path of repeated PIPEs to raise funds, successive issues become uninformative to the market. We conclude that, for small public firms, the same motive underlies public equity offerings and repeated private equity offerings — an acute need for cash.
Keywords: Private placements, hedge funds, cash balances, market feedback
JEL Classification: G12, G24, G32, G34
Suggested Citation: Suggested Citation
Floros, Ioannis V. and Sapp, Travis, Why Do Firms Issue Private Equity Repeatedly? On the Motives and Information Content of Multiple PIPE Offerings (June 1, 2012). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1520103 or http://dx.doi.org/10.2139/ssrn.1520103
By Na Dai