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Happily ever after? Lender diversification and performance sensitivity in post-IPO loans

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  • Lin, Luca X.
  • Zhang, Xiaoyu

Abstract

Going public reduces information asymmetry between a firm’s incumbent and potential new lenders. However, we show that while loan spreads are lower in post-IPO loans due to increased lender competition, 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. This indicates that new lenders remain skeptical despite a more “level playing field.” Newly public firms need to commit to performance-sensitive debt to convince outside lenders, despite gaining a credible mechanism to disseminate information to them. Pricing grids do get amended more often ex-post for such loans, reflecting a lender learning process. Newly public firms are indeed still more likely to obtain loans from new lenders post-IPO. Our results suggest that performance pricing can serve to address the remaining information gap with new lenders beyond hard-information disclosure, allowing firms to better diversify their lender base.

Suggested Citation

  • Lin, Luca X. & Zhang, Xiaoyu, 2025. "Happily ever after? Lender diversification and performance sensitivity in post-IPO loans," Journal of Corporate Finance, Elsevier, vol. 92(C).
  • Handle: RePEc:eee:corfin:v:92:y:2025:i:c:s0929119925000422
    DOI: 10.1016/j.jcorpfin.2025.102774
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    More about this item

    Keywords

    Lender diversification; Relationship lending; IPO; Performance pricing;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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