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

Huang, Rongbing; Ritter, Jay R.; Zhang, Donghang

doi:10.2139/ssrn.2205720

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: 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