Investor Objective and Financial Contracting: Evidence from the PIPE Market

Abstract

We investigate empirically how investor objectives condition the design of financial contracts as manifest in private investment in public equity (PIPE) deals. We hypothesize that varying objectives among different types of institutional investors affect the observed allocation of cash flow rights, control rights, and other contractual protections. For instance, strategic investors are more likely to request control rights in comparison to financial investors and may be willing to trade off cash flow rights for control rights. Financial investors, in contrast, are more likely to demand investor protections and be adverse to contractual restrictions on their post-issue trading activity. Empirical analysis of more than 3000 PIPE deals occurring between 1999 and 2007 supports these hypotheses. We also find PIPEs associated with strategic investors outperform those with financial investors. The differences in performance can be explained by the contractual differences in PIPEs conditional on investor objective.