Disclosure versus external certification: Evidence from the SEC vote waiver policy for PIPE’s during COVID 19

Abstract

This study investigates how publicly listed firms can raise new funding when voluntary disclosure is limited. Specifically, we investigate whether sophisticated expert investors can act as a source of information and how they can be incentivized to put “skin in the game” to signal their private information. We address our question in the setting of private investment in public equity (PIPE) offerings by inspecting whether PIPE issuance provides an additional source of information in the information valuation game. In the PIPE setting, knowledgeable expert institutional investors buy unregistered stock in a limited firm disclosure environment. Such purchases can act as a certification signal, reducing other investors’ uncertainty. However, we argue that the identification of such certification effect is hindered by potential selection issues as large PIPEs require the approval of incumbent shareholders who may vote against such issuances that dilute their interest. During the COVID-19 pandemic, the SEC facilitated companies’ PIPE issuance by relaxing previously necessary shareholder voting requirements. We use this change, where incumbent shareholders could no longer block large PIPEs, to uncover the presence and magnitude of a certification effect. We document that PIPE funding can provide a positive certification signal in settings with reduced possibilities for voluntary disclosure. In this way, we identify another information channel that may attenuate information frictions in high informational asymmetry environments.