Information leakage, foreign certification and business groups: Evidence from PIPE deals

Abstract

Private equity firms typically invest in small, privately held companies, help them grow and then exit the firm by taking it public or selling it to an acquirer. However, some times, private equity firms invest in public firms through a type of transaction called private investment in public equity (PIPE). This creates a special interaction between private equity firms and public companies.

In this paper, we study the effect of foreign certification and business group affiliation on short term and long term performance of PIPE deals. We analyse if foreign private equity investors are able to better certify a PIPE investment than domestic private equity investors. We also study if business group affiliation affects the market reaction around PIPE deal announcements. This is also the first time in literature that PIPE deals are being studied in an emerging market.

We use event studies to analyse all PIPE deals in India and find strong evidence of pre-announcement information leakage and post-announcement market efficiency. We find evidence of foreign certification since foreign private equity investor-led PIPEs perform significantly better than domestic private equity investor-led PIPEs in the short term. We also find that business group PIPEs perform better than non-business group PIPEs in the short-term. Interestingly, we find that foreign certification is a temporary effect since the difference in performance between foreign and domestic invested PIPEs vanishes in the long term. However, business group PIPEs perform significantly better than non-business group PIPEs in the long term thus showing that the business group effect persists longer than foreign certification.