Happily Ever After? Lender Competition and Performance Sensitivity in Post-IPO Loans
48 Pages Posted: 27 Nov 2023
Date Written: October 28, 2023
Existing evidence suggests that firms enjoy lower interest rates in loans obtained following their equity IPOs, due to reduced information frictions with potential new lenders and decreased hold-up power by incumbent lenders. We show that while spreads are lower in post-IPO loans, the likelihood of having interest-increasing performance-pricing, which automatically increases spreads if firm performance deteriorates, is substantially heightened, only for loans from new lenders. Such evidence indicates that new lenders retain skepticism despite a more “level playing field” following an information-releasing event. Newly public firms need to commit to performance-sensitive debt to convince them. As a result, firms are even less likely to switch to new lenders following IPOs. Our results suggest that relationship lenders enjoy an advantage for securing lending business even after borrowers gain a credible mechanism to disseminate information to outside lenders.
Keywords: Lender competition, Relationship lending, IPO, Performance Pricing
JEL Classification: G21, G32
Suggested Citation: Suggested Citation