How Reverse Merger Firms Raise Capital in PIPEs: Search Costs and Placement Agent Reputation

Review of Quantitative Finance and Accounting (RQFA), January 2021, 56(1), 143-184.

54 Pages Posted: 28 Jun 2019 Last revised: 11 Aug 2021

See all articles by Onur Bayar

Onur Bayar

University of Texas at San Antonio - Carlos Alvarez College of Business

Yini Liu

University of Western Ontario

Juan Mao

University of Texas at San Antonio - Department of Accounting

Date Written: June 23, 2019

Abstract

We examine the role of placement agents in private investments in public equity (PIPE) deals of firms that went public via a reverse merger (RM). We find that reputable placement agents with greater expertise (expert agents) help RM firms to complete their PIPE deals in a smaller number of financing rounds (closings) and raise funds from a larger base of private investors. In exchange for these benefits, RM firms advised by expert agents agree to more investor-friendly contract terms and pay higher cash compensation to their placement agents. Overall, our evidence indicates that, while expert PIPE agents use their superior networking capabilities to reduce the search costs of RM firms, they also exercise more bargaining power against RM firms compared to non-expert PIPE agents. Finally, compared to the PIPE offerings of IPO firms, the PIPE offerings of RM firms are more likely to involve deals with multiple closings and larger offer price discounts. This suggests that raising new capital in PIPEs entails significantly higher costs for RM firms than IPO firms.

Keywords: Private Investment in Public Equity; Reverse Mergers; Financial Intermediaries; PIPEs with multiple closings; Financial Contracting; IPOs

JEL Classification: G23; G32; G34

Suggested Citation

Bayar, Onur and Liu, Yini and Mao, Juan, How Reverse Merger Firms Raise Capital in PIPEs: Search Costs and Placement Agent Reputation (June 23, 2019). Review of Quantitative Finance and Accounting (RQFA), January 2021, 56(1), 143-184. , Available at SSRN: https://ssrn.com/abstract=3410696 or http://dx.doi.org/10.2139/ssrn.3410696

Onur Bayar

University of Texas at San Antonio - Carlos Alvarez College of Business ( email )

The University of Texas at San Antonio
One UTSA Circle
San Antonio, TX 78249
United States
210-458-6837 (Phone)
210-458-6320 (Fax)

Yini Liu (Contact Author)

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

Juan Mao

University of Texas at San Antonio - Department of Accounting ( email )

One UTSA Circle
San Antonio, TX 78249
United States
210-458-8305 (Phone)

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