Proprietary Costs and the Equity Financing Choice

61 Pages Posted: 22 Apr 2019 Last revised: 22 Feb 2022

See all articles by Ioannis V. Floros

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance

Shiva Sivaramakrishnan

Rice University

Rustam Zufarov

University of Illinois at Chicago

Date Written: March 22, 2019

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

Suggested Citation

Floros, Ioannis V. and Sivaramakrishnan, Shiva and Zufarov, Rustam, Proprietary Costs and the Equity Financing Choice (March 22, 2019). Available at SSRN: https://ssrn.com/abstract=3352143 or http://dx.doi.org/10.2139/ssrn.3352143

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Rustam Zufarov (Contact Author)

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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