Happily Ever After? Lender Competition and Performance Sensitivity in Post-IPO Loans

48 Pages Posted: 27 Nov 2023

See all articles by Luca X. Lin

Luca X. Lin

HEC Montreal - Department of Finance

Xiaoyu Zhang

Vrije Universiteit Amsterdam (VU Amsterdam)

Date Written: October 28, 2023

Abstract

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

Lin, Luca Xianran and Zhang, Xiaoyu, Happily Ever After? Lender Competition and Performance Sensitivity in Post-IPO Loans (October 28, 2023). Available at SSRN: https://ssrn.com/abstract=4616373 or http://dx.doi.org/10.2139/ssrn.4616373

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Xiaoyu Zhang

Vrije Universiteit Amsterdam (VU Amsterdam) ( email )

De Boelelaan 1105
Amsterdam, North Holland 1081 HV
Netherlands

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