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Access to Private Equity and Real Firm Activity: Evidence from PIPEs

38 Pages Posted: 2 Nov 2011  

James R. Brown

Iowa State University - Department of Finance

Ioannis V. Floros

Iowa State University - Department of Finance

Date Written: October 26, 2011

Abstract

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

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

James R. Brown (Contact Author)

Iowa State University - Department of Finance ( email )

College of Business
Ames, IA 50011-2063
United States
5152944668 (Phone)

Ioannis V. Floros

Iowa State University - Department of Finance ( email )

3346 Gerdin Business Bldg
Ames, IA 50011-1350
United States
515-294-2269 (Phone)
515-294-3525 (Fax)

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