The cost of debt around the IPO

Abstract

Purpose

The purpose of this study is to provide empirical evidence on a possible economic explanation for changes in borrowing costs of US private firms that are going public.

Design/methodology/approach

Using an OLS regression with firm fixed effects and the IPO as an information releasing event that alters information asymmetries between borrowers and lenders and relying on several proxies for pre-IPO information asymmetries, I analyze the impact of the IPO on changes in borrowing costs from before to right after an IPO of firms with high pre-IPO information asymmetries.

Findings

My findings indicate that small firms, firms with high R&D, firms with negative EBITDA and firms with a single lending relationship benefit more from going public by realizing larger decreases in borrowing costs after an IPO than firms with lower pre-IPO information asymmetries. The results are consistent with changing information asymmetries caused by the IPO event playing a role in changes in borrowing costs after the IPO. Furthermore, I provide empirical evidence that a reduction in the lender’s bargaining power due to the IPO event plays an important role in explaining changes in borrowing costs around that time.

Originality/value

This study uses a hand-collected data set of loans obtained from financial statements issued by US firms at the time of their IPO. As a result, I am able to comprehensively document changes of borrowing costs of US private firms going public and shed light on one of the economic forces behind those changes.