Private Placements and Managerial Entrenchment

Financing Under Extreme Uncertainty: Evidence from Private Investments in Public Equities

“…The type of PIPE investments we study differs from the private placements studied by, among others, Wruck, (1989), Hertzel and Smith (1993), Barclay, Holderness, and Sheehan (2003) and Krishnamurthy, Spindt, Subramaniam, and Woidtke (2005) on several dimensions. First, although private placements usually include restricted shares that prevent investors from selling their shares in the public market for a year or longer, the equity issued via a PIPE offering can be publicly traded once it is 2 registered, typically within a few months after the PIPE transaction.…”

“…In previous studies, the announcement date price reactions to private placements of equity have been attributed to information effects (Hertzel and Smith (1993)), greater monitoring due to increased ownership concentration (Wruck (1989)), and liquidity costs due to the resale restrictions on the shares (Silber (1991)) and entrenchment (Barclay, et al (2003)). Hertzel and Smith (1993) argue that the extended discussions and negotiations between a firm and private investors during a private placement can allow private investors to resolve some of the asymmetric information about a firm's value.…”

“…PIPEs generally include warrants along with a wide array of other complex features. Third, Barclay, et al (2003) document that private investors tend to be long-term shareholders who generally retain a significant ownership stake and monitoring function in the firm. Hedge funds are most frequent investors in PIPEs.…”

“…At this point it is reasonable to ask how PIPEs differ from traditional private placements, such as those studied by Wruck (1989), Hertzel and Smith (1993), Barclay, et al (2003), andKrishnamurthy, et al (2005). 8 Among these studies, the earliest sample dates from 1979, prior to the adoption of Reg S, and the latest ends in 1997, before the large growth in the PIPE market.…”

The Calculation of Returns during Seasoned Equity Offers

“…Several event studies of private placements measure returns with no adjustment for the discount (Kang & Stulz, 1996;Allen & Phillips, 2000;Cronqvist & Nilsson, 2005;Wu & Wang, 2005;Barclay, Holderness & Sheehan, 2007;Maynes & Pandes, 2008;Wruck & Wu, 2009). Previous event studies of UK placings also make no adjustment for discounts (Slovin, Sushka & Lai, 2000;Barnes & Walker, 2006;Balachandran et al, 2009).…”