Three Essays on Private Investments in Public Equity




Liu, Yini

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This dissertation investigates the U.S. listed public firms’ financing activities through private equity offerings. The first essay examines the role of placement agents in private investments in public equity (PIPE) deals of firms that went public via a reverse merger (RM). Reputable placement agents with greater expertise help RM firms to complete their PIPE deals in a smaller number of financing rounds and raise funds from a larger base of private investors. In exchange for these benefits, RM firms advised by expert agents agree to more investor-friendly contract terms and pay higher cash compensation to their placement agents. Overall, the evidence indicates that, while expert PIPE agents use their superior networking capabilities to reduce the search costs of RM firms, they also exercise more bargaining power against RM firms compared to non-expert PIPE agents.

The second essay studies the effect of litigation risk on the characteristics of PIPE deals. PIPE firms face costly securities class action lawsuits as these firms are not exempt from antifraud, civil liability, or other provisions of federal securities laws. First, using data on securities class action lawsuits initiated before the PIPE transactions, this essay finds that litigation risk affects firms’ security choice in PIPEs subsequent to prior litigation. Consistent with a greater potential disagreement between firm insiders and outside investors, previously litigated public firms are less likely to issue common stock and more likely to issue convertible securities (debt or preferred stock) in PIPEs. Second, previously litigated firms offer more investor control rights and investor protection terms in their PIPE contracts. Third, consistent with the hypothesis that previously litigated public firms are more averse to diluting the ownership stakes of their current shareholders, PIPE offer price discounts are negatively associated with firms’ pre-PIPE litigation risk. Furthermore, firms offering larger price discounts in their PIPEs, are more likely to incur future litigation and experience lower long-term abnormal stock returns post-issue.

The third essay examines the impact of litigation risk on short selling activity around PIPE transactions. PIPE issuers that incurred securities class action lawsuits prior to the PIPE offering are shorted more heavily around the PIPE issuance date. Heterogeneity in the level of issuers’ litigation risk such as the case status at the time of security issue and the timing of the private placement after the litigation event affects the extent of short selling activity surrounding PIPEs. In addition, the effects of litigation risk on short selling are more pronounced in PIPEs where lead investors are hedge funds. This study implies that outside investors incorporate value-relevant information about issuing firms’ litigation risk through their short selling activity around PIPE offerings.


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Law and Finance, Private Investments in Public Equity, Reverse Merger, Short Selling