Prior banking relationships and long-term IPO performance

Abstract

Using a unique dataset of loan information disclosed in Chinese firms' initial public offering (IPO) prospectuses, we investigate how prior banking relationships affect the long-term performance of IPOs. The findings suggest that when an IPO firm has a pre-IPO relationship with a bank that includes larger loans or greater loan spreads, its long-term performance is higher. Specifically, we find a 1% increase in the average loan-to-asset ratio (average loan spread) will result in a 1.32% (10.22%) increase in the three-year post-IPO stock return. Additional analysis suggests that firms with higher average loan-to-asset ratios and loan spreads have, on average, higher combined three-years post-IPO asset growth, debt growth, sales growth, and net income growth. Collectively, we show that a bank's knowledge of loan information as a result of a banking relationship that existed prior to the IPO has a material impact on the performance of new firms, which is consistent with the interpretation that bank monitoring has a positive role in firm value.