How reverse merger firms raise capital in PIPEs: search costs and placement agent reputation

Onur Bayar (), Yini Liu () and Juan Mao ()
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Onur Bayar: University of Texas at San Antonio
Yini Liu: Western University
Juan Mao: University of Texas at San Antonio

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 1, No 6, 143-184

Abstract: Abstract We examine the role of placement agents in private investments in public equity (PIPE) deals of firms that went public via a reverse merger (RM). We find that reputable placement agents with greater expertise (expert agents) help RM firms to complete their PIPE deals in a smaller number of financing rounds (closings) 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, our 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. Finally, compared to the PIPE offerings of IPO firms, the PIPE offerings of RM firms are more likely to involve deals with multiple closings and larger offer price discounts. This suggests that raising new capital in PIPEs entails significantly higher costs for RM firms than IPO firms.

Keywords: Private investment in public equity; Reverse mergers; Financial intermediaries; PIPEs with multiple closings; Financial contracting; IPOs (search for similar items in EconPapers)
JEL-codes: G23 G32 G34 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-020-00889-7

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