38 Pages Posted: 2 Nov 2011
Date Written: October 26, 2011
We study how access to private equity financing affects real firm activities using a broad panel of publicly traded U.S. firms that raise external equity through private placements (PIPEs) between 1995 and 2008. The public firms relying on PIPEs are generally small, high-tech firms that cannot finance investment internally and likely face severe external financing constraints; PIPEs are by far the most important source of finance for these firms. We show that firms use PIPE inflows to maintain extremely high R&D investment ratios and to build substantial cash reserves. We also use GMM techniques that control for firm-specific effects and the endogeneity of the decision to raise private equity and find that PIPE funding has a substantial impact on corporate investment in cash reserves and R&D, and a smaller but significant impact on investment in non-cash working capital, but little impact on fixed investment or acquisitions. Our estimates indicate that R&D investment initially increases by $0.20-$.25 for each dollar of private equity flowing into the firm, and that PIPE funds initially invested in cash ultimately go to R&D. These findings offer direct evidence that access to private equity finance has an important effect on the key input that drives innovation at the firm- and economy-wide levels.
Keywords: Private equity, R&D, innovation, private investment in public equity, cash holdings, value of liquidity, PIPEs
JEL Classification: G12, G24, G31, G32, G34
Suggested Citation: Suggested Citation
Brown, James R. and Floros, Ioannis V., Access to Private Equity and Real Firm Activity: Evidence from PIPEs (October 26, 2011). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1952838
By Na Dai