Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing

63 Pages Posted: 23 Jan 2013 Last revised: 23 Feb 2014

See all articles by Rongbing Huang

Rongbing Huang

Kennesaw State University - Michael J. Coles College of Business

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Donghang Zhang

University of South Carolina - Darla Moore School of Business

Date Written: February 20, 2014

Abstract

A popular view is that private equity (PE) firms tend to expropriate other stakeholders of their portfolio companies. Bonds offered during 1992-2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by PE-backed companies are on average 70 basis points lower, holding other things constant. We also find that PE-backed companies have more conservative investment and dividend policies after bond offerings compared to non-PE-backed companies. These results suggest that PE firms’ reputational concerns dominate their wealth expropriation incentives and help their portfolio companies reduce the costs of debt.

Keywords: IPOs, Buyout Groups, Private Equity, Reputation, Agency Costs, Bond Offering

JEL Classification: G32, G29

Suggested Citation

Huang, Rongbing and Ritter, Jay R. and Zhang, Donghang, Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing (February 20, 2014). Available at SSRN: https://ssrn.com/abstract=2205720 or http://dx.doi.org/10.2139/ssrn.2205720

Rongbing Huang

Kennesaw State University - Michael J. Coles College of Business ( email )

560 Parliament Garden Way
Mail Drop #0403
Kennesaw, GA 30144
United States

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/ritter

Donghang Zhang (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
452
Abstract Views
2,696
rank
65,339
PlumX Metrics