The Choice of Public vs. Private Equity: Evidence from the SEO and Pipe Markets

We examine the determinants of the choice of private versus public equity as a source of financing. We study private investments in public equity and seasoned equity offerings during 1996 to 2006, and analyze the short term and long term abnormal returns in SEO and PIPE transactions and their determinants. We find that PIPE issues have higher discount than SEO deals based on risk adjusted abnormal returns, however our long run analysis suggests that PIPE issuers outperform SEO firms. We employ a matched sample analysis based on industry, firm size and profitability for PIPE and SEO issues in the USA and document that firms that are more likely to use PIPE tend to be smaller, riskier and high growth companies, compared to SEO issuers. Based on our matched sample analysis, PIPE issuers are less transparent, more cash restricted and facing higher bankruptcy cost at issue than are SEO issuers. Finally, we observe that the issue discounts for PIPEs and SEOs are not different for the matched sample. Therefore when total cost of equity offering is considered PIPE may be a lower cost alternative for firms with certain characteristics than using SEO.