Loan Market Benefits of (High) IPO Underpricing

Abstract

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.