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
Date Written: April 20, 2009
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: Suggested Citation