Abstract
This paper documents the impact of bond IPOs on the agency costs of equity. We find that bond market entry is received unfavorably when the debt issue is motivated by keeping a lock on control. Conversely, when discipline is expected to increase due to bond market entry (high free cash flow, low dividends), stock price reactions are more positive. Moreover, the strength of these relations is affected by worldwide differences in shareholder protection. Free cash flow has a larger impact when investor protection is stronger, whereas dividends and control locks are more important when shareholder protection is poor.
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