Financing Under Extreme Risk: Contract Terms and Returns to Private Investments in Public Equity

47 Pages Posted: 14 Jun 2006 Last revised: 16 Dec 2009

Susan Chaplinsky

University of Virginia - Darden School of Business

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration

Date Written: April 20, 2009

Abstract

We study financial contracting using transactions from the private investments in public equity (PIPEs) market. Our tests show that the use of terms that are contingent on an issuer’s future performance increases with issuer risk. Among issuers with poorer stock performance, higher cash burn rates, and more uncertain investment prospects, purchase discount-only contracts are uncommon and contracts with contingent terms are frequently used. Our evidence also supports arguments that issuer bargaining power with investors erodes as financing alternatives grow more limited. In particular, terms that can transfer control to investors are most commonly used by issuers in the weakest financial condition.

Keywords: private placements, financial distress, contracting costs, equity issuance

JEL Classification: G24

Suggested Citation

Chaplinsky, Susan and Haushalter, David, Financing Under Extreme Risk: Contract Terms and Returns to Private Investments in Public Equity (April 20, 2009). Available at SSRN: https://ssrn.com/abstract=907676 or http://dx.doi.org/10.2139/ssrn.907676

Susan J. Chaplinsky (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4810 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/chaplinsky.htm

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration ( email )

University Park, PA 16802
United States
814-863-7969 (Phone)
814-865-3362 (Fax)

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