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Raising Capital

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Commonwealth Hall A2
Hosted By: American Finance Association
  • Chair: Jean-Noel Barrot, Massachusetts Institute of Technology

The Economics of PIPE Investing

Jongha Lim
,
California State University-Fullerton
Michael Schwert
,
Ohio State University
Michael Weisbach
,
Ohio State University

Abstract

This paper investigates the pricing of private investments in public equities (PIPEs). We consider a sample of 4,648 investments in public companies by hedge funds and private equity funds. Issuing firms tend to be small and poorly performing, so they have limited access to traditional sources of finance. To attract capital, they offer shares at a substantial discount to the market price, along with warrants and a collection of other rights. Because of the discount and attached warrants, the average unregistered PIPE investment earns a 22.6% return in the year following the investment, in spite of the 0.6% return on the underlying stock during this period. The returns to investors depend heavily on the investment horizon, with longer holding periods leading to lower returns. We provide new evidence on registration terms and the liquidity of PIPE investments that indicates PIPE investors are short-term shareholders who earn abnormal returns. Our findings confirm that PIPEs are an expensive source of capital for small firms.

What Do Insiders Know? Evidence From Insider Trading Around Share Repurchases and SEOs

Peter Cziraki
,
University of Toronto
Evgeny Lyandres
,
Boston University
Roni Michaely
,
Cornell University

Abstract

We examine the nature of information contained in insider trades prior to corporate events. Insiders’ net buying increases before open market share repurchase announcements and decreases before SEOs. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading predicts announcement returns and, for repurchases, the long-term drift following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment. Information about fundamentals is incorporated slowly into prices, while information about mispricing is incorporated faster.

Optimal Issuance Under Information Asymmetry and Accumulation of Cash Flows

Pavel Zryumov
,
University of Rochester
Haoxiang Zhu
,
Massachusetts Institute of Technology
Ilya Strebulaev
,
Stanford University

Abstract

We study the optimal timing of security issuance to finance a new project when the firm’s assets in place have unobservable quality. Stochastic cash flows generated by assets in place reveal information about their quality and simultaneously reduce the required outside funding. A high-quality firm optimally delays issuance unless its accumulated cash or the market belief about its quality is sufficiently high. A low- quality firm does the same and, additionally, issues if market belief and accumulated cash are sufficiently low. Under stated restrictions, the renegotiation-proof optimal security pays outside investors in full before paying anything to original shareholders.

Key Investors in IPOs

David Brown
,
University of Arizona
Sergei Kovbasyuk
,
Einaudi Institute for Economics and Finance

Abstract

We statistically identify institutional investors who persistently hold US IPOs with high initial returns. As a group, these key investors' holdings are strongly related to initial returns and offer price revisions, more so than any other variables. Key investors are better informed than other investors; their trades predict future returns and their participation more strongly relates to initial returns when they specialize in the IPO rm's industry. Instrumenting investor participation with pre-IPO information we show that investors' industry specializations and their underwriter relationships, predict initial returns.
Discussant(s)
Paige Ouimet
,
University of North Carolina
Lauren Cohen
,
Harvard Business School
Philip Bond
,
University of Washington
Francois Derrien
,
HEC Paris
JEL Classifications
  • G3 - Corporate Finance and Governance