The certification role of insider participation in PIPEs

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.