Proprietary Costs and the Equity Financing Choice

Abstract

We develop a firm-level private information index with three unique features. First, the index is a direct measure of the nature and magnitude of private information that is proprietary. Second, it is multi-dimensional. Third, it is not specific to any one setting. We conduct several tests to validate this index against extant firm-specific and industry-level proprietary cost proxies. We then use it to examine the role of proprietary information in a firm’s equity financing choice between private investments in public equity (PIPEs) and seasoned equity offerings (SEOs). In this context, the proprietary cost hypothesis posits that firms wanting to avoid public dissemination of sensitive private information can do so more effectively by choosing PIPEs over SEOs. Our tests provide strong support for the hypothesis. The results are robust to alternate index specifications and other factors that influence this choice.

Keywords: Corporate Disclosures, Proprietary Cost, SEO, PIPE

JEL Classification: G32, G38, L1, M41