The Economics of PIPEs
Jongha Lim, Michael Schwert and Michael S. Weisbach, Journal of Financial Intermediation (Forthcoming)
54 Pages Posted: 21 Oct 2017 Last revised: 29 Aug 2019
Date Written: June 25, 2019
Private investments in public equities (PIPEs) are an important source of finance for public corporations. PIPE investor returns decline with holding periods, while time to exit depends on the issue’s registration status and underlying liquidity. We estimate PIPE investor returns adjusting for these factors. Our analysis, which is the first to estimate returns to investors rather than issuers, indicates that the average PIPE investor holds the stock for 384 days and earns an abnormal return of 19.7%. More constrained firms tend to issue PIPEs to hedge funds and private equity funds in offerings that have higher expected returns and higher volatility. PIPE investors’ abnormal returns appear to reflect compensation for providing capital to financially constrained firms.
Keywords: PIPE, private placement, alternative investment, hedge fund, private equity fund, warrant
JEL Classification: G23, G32, G12
Suggested Citation: Suggested Citation