Why Don't Issuers Get Upset About IPO Underpricing? Evidence from the Loan Market
52 Pages Posted: 26 Jan 2018 Last revised: 17 Sep 2020
Date Written: June 20, 2020
This paper provides evidence on the loan market benefits of IPO underpricing. We show that higher underpricing is associated with a significantly larger reduction of the issuer's post-IPO borrowing costs. The resulting interest savings are substantial, on average USD 3 million per year. Neither price revision before the IPO nor the first-week or -month stock return after the IPO has a similar effect, suggesting that underpricing plays a unique role in reducing the issuer's borrowing costs. The effect is concentrated in firms with a high demand for advertisements, suggesting that underpricing affects borrowing costs likely through a marketing channel.
Keywords: IPO, Underpricing, Syndicated Loans, Loan Spreads, Borrowing Costs
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