Premium PIPEs: Share Issuances that Exceed the Market Price

Abstract

Private investments in public equity (PIPEs) are frequently issued above the market price. Although largely ignored in prior literature, premium PIPEs constitute 24.5% of common stock PIPE issuances. They are prevalent across time, issuer industry, and investor type. Average abnormal announcement returns are 9.4% greater for premium PIPEs than discount PIPEs. Adverse selection problems are mitigated because the issuer negotiates the price with a small group of sophisticated investors. We find investors' willingness to pay a premium certifies issuer undervaluation resulting from private information or evolving strategic/monitoring relationships. In premium PIPEs, undervalued firms issue shares instead of repurchasing shares.

Keywords: JEL classification: G14, G23, G24, G32, G34 Premium offerings, Private Information Sharing, Private Investments in Public Equity (PIPEs), Private Placements, Undervaluation, Certification

JEL Classification: G14, G23, G24, G32, G34