How costly is follow-on financing after premature going-public decisions?

Abstract

This paper examines rent sharing in Private Investments in Public Equity (PIPEs) between newly public firms and private investors. The evidence suggests highly asymmetric rent sharing. Newly public firms earn a negative return of up to -15% in the first post-PIPE year, while investors benefit due to the ability to dictate transaction terms. The results are economically relevant because newly public firms are, at least in recent years, more likely to tap private rather than public markets for follow-on financing shortly after the Initial Public Offering (IPO), and because the results for newly public firms contrast with those for the broad PIPE market in Lim et al. (2019). The study also contributes to the PIPE literature by offering an integrative view of competing theories of the cross-section of post-PIPE stock returns. We simultaneously test proxies for corporate governance, asymmetric information, bargaining power, and managerial entrenchment. While all explanations have univariate predictive power for the post-PIPE performance, only the proxies for corporate governance and asymmetric information are robust in ceteris-paribus tests.

Keywords: Private Investment in Public Equity (PIPE), Private Equity, Newly Public Firms, Initial Public Offering (IPO).

JEL Classification: G23, G32, L26, M13