Financial Contracts in Pipe Offerings : The Role of Expert Placement Agents

PIPEs are an important source of financing for many companies, yet controversial due to their harsh contractual structures. We present a detailed study of how PIPE contracts allocate contingent cash flow rights between investor and issuer. We find that issuers advised by high-ranking “expert” agents agree to more investor-friendly contract terms than issuers advised by low-ranking “non-expert” agents. This result cannot simply be explained by matching because expert agents match with larger and higher quality issuers, which have less investor-friendly contract terms. Instead, this result suggests that expert agents help their issuer-clients better understand the payoff consequences of negotiable terms. Armed with such understanding, issuers are willing to agree to more investor-friendly terms as long as they receive adequate compensation. We find that issuers with expert agents negotiate more attractive pricing (i.e., lower discounts) when they agree to investor-friendly terms. Such contract design can benefit issuers since investor-friendly terms mitigate the severe moral hazard and adverse selection problems that surround PIPEs. As evidence of such benefit, we find that long-run stock returns are higher for PIPEs with more investor-friendly terms and with expert agent involvement. Our conclusion is that expert advisors fulfill an important value-creating role in PIPE contract negotiations