Litigation and Information Effects on Private Sales of Securities

Abstract

We analyze the resolution of information asymmetry in transactions of private investments in public equity (PIPEs) in which the issuer has experienced class action lawsuits. We explain the associated wealth and pricing effects (information effects). We show that litigated PIPEs are associated with higher announcement wealth effects and lower levels of discounts than non-litigated PIPEs. We find that disclosure, prior investors’ ownership, early registration, and intermediation have positive information effects on incumbent and new investors when issuers concurrently pursue the desired corporate actions (proxied by the auditor changes). We conclude that PIPE issuers can mitigate information effects from prior litigation.