Loan Market Benefits of (High) IPO Underpricing

Abstract

We provide novel evidence on the loan market benefits of high IPO underpricing. We show that greater underpricing is associated with a significantly larger within-firm reduction of post-IPO borrowing costs. This benefit of underpricing is less pronounced for firms with high ex-ante information asymmetry and is concentrated in firms with a high demand for advertisements. In addition, neither price revision before the IPO nor the short-term or long-term stock return after the IPO has a similar effect. Our results are supportive that underpricing affects borrowing costs through an attention channel and highlight a real economic effect of underpricing from the loan market.

Keywords: IPO, Underpricing, Syndicated Loans, Loan Spreads, Borrowing Costs

JEL Classification: G14, G21, G24, G30, G32