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19-09-2023 | Original Research

PIPEs, firm investment, and viability

Authors: Mark D. Walker, Qingqing Wu

Published in: Review of Quantitative Finance and Accounting

Abstract

Using 2342 PIPEs, we investigate the intended use of funds and its relation to firm characteristics and issue outcomes. We find that a slight majority of issues are for investment purposes with the rest being for purposes related to enhancing firm viability. The offer discounts to the private investors and the market’s reaction to the announcement are more related to investment quality for the invest firms and to recovery value for the viability firms. Through an examination of follow-on financing activities, we find broad evidence that PIPEs play an important function and not simply as a stopgap source of finance.

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See Chen, Dai, and Schatzberg (2010) and Chakraborty and Gantchev (2013) for evidence that firm characteristics associated with financial distress predict PIPEs issues versus other forms of finance.

Prior literature reports a higher discount using earlier time periods. Chakraborty and Ganchev (2013) finds an average discount of 13%. Other studies also report substantial discounts, such as Wruck (1989), Hertzel and Smith (1993), and Barclay, Holderness and Sheehan (2007). The first half of our sample (2002–2010) has a discount of 10.3% consistent with these studies.

See Corwin (2003) and Mola and Loughran (2004).

Please see Chakraborty and Ganchev (2013) for evidence on announcement returns for PIPEs. For SEO announcement returns, see Denis (1994) and Walker and Yost (2008). More recently, an increase in shelf registrations makes the magnitude harder to measure; however, studies still consistently find negative abnormal returns. For example, see Dutordoir, Strong, and Sun (2018) and Walker and Wu (2019). SEOs are typically used to finance large investment programs (Woojin and Weisbach 2008; Walker and Yost 2008, and Barclay, Fu, and Smith, 2021).

Gomes and Phillips (2012) find that firms with higher R&D expenses are more likely to issue in the private market than in the public market and their conditional probability of private equity financing is higher compared to that of private debt. Floros, Sivaramakrishnan, and Zufarov (2023) argue that firms with higher proprietary costs would choose PIPEs over SEOs to avoid dissemination of their private information.

See Brophy, Ouimet, Sialm (2009), Chaplinsky and Haushalter (2010), and Lim, Schwert, and Weisbach (2021).

See Barclay, Fu, and Smith (2021) for a detailed discussion of SEOs.

We apply this screening to remove the PIPE observations in PlacementTracker that are actually SEOs and those too close following a SEO for a cleaner event study. A random hand search confirms that if a “PIPE” is too close to a SEO in time, size, or both, it is highly likely a public offering.

Bayar, Liu and Mao (2020) find that some PIPE firms go through multiple closings to find a sufficient number of investors to raise the capital needed. Although our sample does not include PIPEs by reverse merger firms, the evidence that invest PIPEs are larger and have more top investors is consistent with their finding.

See Barclay, Holderness and Sheehan (2007), Walker and Yost (2008), Lim, Schwert, and Weisbach (2021), among others.

See for example, Iliev and Lowry (2020) and Momtaz (2023).

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Title: PIPEs, firm investment, and viability
Authors: Mark D. Walker
Qingqing Wu
Publication date: 19-09-2023
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-023-01200-0