Premium PIPEs: Why Do Investors Pay More than the Market Price?

Part of the Lubar Research Seminar Series

Speaker: Yianni Floros, University of Wisconsin Milwaukee        

Private investments in public equity (PIPEs) are frequently issued at a price above the prevailing market price. Although the prior literature largely ignores premium PIPEs, they constitute 24.5% of common stock PIPE issuances and are prevalent across time, issuer industry, and investor type. Neither offer size nor issuer liquidity explains premium PIPEs. Average abnormal announcement returns are 9.4% greater for premium PIPEs than discount PIPEs. Long-term returns are also significantly higher for premium PIPEs. We find investors’ willingness to pay a premium certifies issuer undervaluation resulting from either private information or evolving strategic/monitoring relationships. Our results are not consistent with investors paying a premium in return for contractual features subsequently used to extract value from issuers, such as warrants or board seats. In premium PIPEs, undervalued firms issue shares instead of repurchasing shares.