Corporate PIPEs and the Boundaries of the Firm: Evidence From Innovation

Abstract

We explore the innovation of corporations issuing PIPEs (Private Investments in Public Equity) that are financed by other corporations. PIPE issuers exhibit a positive relation between their future innovation activity and the innovation capability of the corporate investor. This relation strengthens when the issuer’s and investor’s technical abilities overlap. These PIPE financings often coincide with material contracts indicating strategic collaborations between the issuer and the investor. In these instances, consistent with knowledge sharing and spillover, we find that PIPEs accompanying strategic product market interactions associate with even greater future issuer innovation. We conclude that PIPEs help align incentives in the face of incomplete contracting and facilitate expansion of firm boundaries to exploit investment opportunities that require knowledge sharing.

Keywords: Innovation activity; strategic collaboration; corporate private placements; knowledge sharing; contracting

JEL Classification: G10; G14; G24; G32