Litigation and Information Effects on Private Sales of Securities

Abstract

We analyze PIPE (Private Investments in Public Equity) transactions in which the issuer experienced class action lawsuits. We explain the associated information effects measured by the announcement wealth effects and the discounts. Counting on a comprehensive, hand-gathered dataset, we show that the more severely litigated PIPEs are associated with higher announcement wealth effects and higher levels of discounts. We find that the issuer’s voluntary disclosure positively influences PIPE information effects particularly when coupled with auditor changes. We report that certain mitigation actions affect the pricing of PIPEs along with their associated wealth effects while facing ongoing litigation. We posit that confidentiality in privately negotiated securities is the key in litigated transactions as issuers efficiently share the operational details of mitigation efforts. PIPE transactions are not necessarily costlier funding venues even when securities class action lawsuits are ongoing compared to the PIPE transactions that did not experience any prior litigation action.

Keywords: Law and Finance; Information Effects; Private Investment in Public Equity (PIPE); Private Placements; Mitigation Actions

JEL Classification: G14; G23; G32; K41; K42