The Economics of PIPEs

Fisher College of Business Working Paper No. 2017-03-022

Charles A. Dice Center Working Paper No. 2017-22

51 Pages Posted: 21 Oct 2017 Last revised: 14 Mar 2019

See all articles by Jongha Lim

Jongha Lim

California State University - Fullerton

Michael Schwert

University of Pennsylvania - The Wharton School

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: March 4, 2019

Abstract

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

Lim, Jongha and Schwert, Michael and Weisbach, Michael S., The Economics of PIPEs (March 4, 2019). Fisher College of Business Working Paper No. 2017-03-022. Available at SSRN: https://ssrn.com/abstract=3056286 or http://dx.doi.org/10.2139/ssrn.3056286

Jongha Lim

California State University - Fullerton ( email )

SGMH 5170
Fullerton, CA 92831
United States
657-278-7987 (Phone)

Michael Schwert (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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