Banks’ Private Information and the Supply of Equity Capital: Evidence from Share Issuance and Withdrawal

Abstract

If banks reveal their private information it should influence investors’ willingness to supply equity capital. We examine this in the setting of IPO markets using a private-information proxy from credit standards. We find that an unfavorable private-information signal results in a decline (increase) in the number of IPOs (withdrawals), indicating a rational capital-supply-driven link between bank loan and IPO markets. This link is strongest where banks’ private information should be most valuable to outside investors and is robust to endogeneity and changes in capital demand. Our results suggest that the credit channel is important to a wellfunctioning IPO market.

Keywords: IPO, withdrawn IPO, credit standards, lending standards, private information

JEL Classification: G21, G23, G24