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The certification role of insider participation in PIPEs

Author

Listed:
  • Ioannis V. Floros

    (University of Wisconsin-Milwaukee)

  • Nandu J. Nagarajan

    (University of Texas at Arlington)

  • Shiva Sivaramakrishnan

    (Rice University)

Abstract

In this paper we provide new insights into the motives underlying insider participation in private investments in public equity (PIPEs) by considering the association among insider participation, pricing, and contractual terms. PIPEs are a financing choice that have become popular over the last decade and frequently involve insider participation. We find that board seats and weak pre-PIPE performance are important determinants of insider participation. We also find evidence in support of the certification motive for insider participation. In particular, we show that insider participation is associated with lower PIPE discounts and improved future firm operating performance. Announcement wealth effects are significantly higher when insiders participate than when they are absent both for single and repeated PIPE transactions. We extend the prior literature by documenting that the insider certification effect also exists for repeated PIPE transactions and that the granting of control mechanisms, such as board seats, is an important component of contractual arrangements in insider participation, potentially to achieve incentive alignment by mitigating moral hazard considerations.

Suggested Citation

  • Ioannis V. Floros & Nandu J. Nagarajan & Shiva Sivaramakrishnan, 2020. "The certification role of insider participation in PIPEs," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1417-1447, May.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:4:d:10.1007_s11156-019-00830-7
    DOI: 10.1007/s11156-019-00830-7
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    Cited by:

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    2. Barg, Johannes A. & Drobetz, Wolfgang & Momtaz, Paul P., 2021. "Valuing start-up firms: A reverse-engineering approach for fair-value multiples from venture capital transactions," Finance Research Letters, Elsevier, vol. 43(C).

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    More about this item

    Keywords

    Private investment in public equity; PIPEs; Insiders; Contract terms; Certification and monitoring; Shareholder approval rule;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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