IDEAS home Printed from https://ideas.repec.org/a/eee/jfinin/v61y2025ics1042957324000603.html
   My bibliography  Save this article

Loan market benefits of (High) IPO underpricing

Author

Listed:
  • Su, Xunhua
  • Zhang, Donghang
  • Zhang, Xiaoyu

Abstract

We provide novel evidence on the loan market benefits of high IPO underpricing. We show that greater underpricing is associated with a significantly larger within-firm reduction of post-IPO borrowing costs. This benefit of underpricing is less pronounced for firms with high ex-ante information asymmetry and is concentrated in firms with a high demand for advertisements. In addition, neither price revision before the IPO nor the short-term or long-term stock return after the IPO has a similar effect. Our results suggest that underpricing affects borrowing costs through an attention channel and highlight a real economic effect of underpricing from the loan market.

Suggested Citation

  • Su, Xunhua & Zhang, Donghang & Zhang, Xiaoyu, 2025. "Loan market benefits of (High) IPO underpricing," Journal of Financial Intermediation, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:jfinin:v:61:y:2025:i:c:s1042957324000603
    DOI: 10.1016/j.jfi.2024.101132
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042957324000603
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfi.2024.101132?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Alexander Ljungqvist & William J. Wilhelm, 2003. "IPO Pricing in the Dot‐com Bubble," Journal of Finance, American Finance Association, vol. 58(2), pages 723-752, April.
    2. Rongbing Huang & Jay R. Ritter & Donghang Zhang, 2023. "IPOs and SPACs: Recent Developments," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 595-615, November.
    3. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    4. Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
    5. Andrew Ellul & Marco Pagano, 2006. "IPO Underpricing and After-Market Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 381-421.
    6. Michelle Lowry & Micah S. Officer & G. William Schwert, 2010. "The Variability of IPO Initial Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 425-465, April.
    7. John H. Boyd & Chun Chang & Bruce Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
    8. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-240, April.
    9. Carola Schenone, 2010. "Lending Relationships and Information Rents: Do Banks Exploit Their Information Advantages?," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1149-1199, March.
    10. Chemmanur, Thomas & Yan, An, 2009. "Product market advertising and new equity issues," Journal of Financial Economics, Elsevier, vol. 92(1), pages 40-65, April.
    11. Keongtae Kim & Anandasivam Gopal & Gerard Hoberg, 2016. "Does Product Market Competition Drive CVC Investment? Evidence from the U.S. IT Industry," Information Systems Research, INFORMS, vol. 27(2), pages 259-281, June.
    12. Gerard Hoberg, 2007. "The Underwriter Persistence Phenomenon," Journal of Finance, American Finance Association, vol. 62(3), pages 1169-1206, June.
    13. Francesca Cornelli & David Goldreich, 2003. "Bookbuilding: How Informative Is the Order Book?," Journal of Finance, American Finance Association, vol. 58(4), pages 1415-1443, August.
    14. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
    15. Francesca Cornelli & David Goldreich, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December.
    16. Anthony Saunders & Sascha Steffen, 2011. "The Costs of Being Private: Evidence from the Loan Market," The Review of Financial Studies, Society for Financial Studies, vol. 24(12), pages 4091-4122.
    17. Omer Brav, 2009. "Access to Capital, Capital Structure, and the Funding of the Firm," Journal of Finance, American Finance Association, vol. 64(1), pages 263-308, February.
    18. Gustavo Grullon, 2004. "Advertising, Breadth of Ownership, and Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 439-461.
    19. Aggarwal, Rajesh K. & Krigman, Laurie & Womack, Kent L., 2002. "Strategic IPO underpricing, information momentum, and lockup expiration selling," Journal of Financial Economics, Elsevier, vol. 66(1), pages 105-137, October.
    20. Laurie Krigman & Wayne H. Shaw & Kent L. Womack, 1999. "The Persistence of IPO Mispricing and the Predictive Power of Flipping," Journal of Finance, American Finance Association, vol. 54(3), pages 1015-1044, June.
    21. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    22. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    23. Marcia Millon Cornett & Evren Ors & Hassan Tehranian, 2002. "Bank Performance around the Introduction of a Section 20 Subsidiary," Journal of Finance, American Finance Association, vol. 57(1), pages 501-521, February.
    24. Tim Loughran & Jay Ritter, 2004. "Why Has IPO Underpricing Changed Over Time?," Financial Management, Financial Management Association, vol. 33(3), Fall.
    25. Jawad M Addoum & Justin R Murfin & Itay Goldstein, 2020. "Equity Price Discovery with Informed Private Debt," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3766-3803.
    26. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    27. Sherman, Ann E. & Titman, Sheridan, 2002. "Building the IPO order book: underpricing and participation limits with costly information," Journal of Financial Economics, Elsevier, vol. 65(1), pages 3-29, July.
    28. Beatty, Randolph P & Welch, Ivo, 1996. "Issuer Expenses and Legal Liability in Initial Public Offerings," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 545-602, October.
    29. Liu, Laura Xiaolei & Lu, Ruichang & Sherman, Ann E. & Zhang, Yong, 2023. "IPO underpricing and limited attention: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 154(C).
    30. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    31. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
    32. repec:bla:jfinan:v:59:y:2004:i:6:p:2871-2901 is not listed on IDEAS
    33. Kim, Dongcheol & Palia, Darius & Saunders, Anthony, 2008. "The Impact of Commercial Banks on Underwriting Spreads: Evidence from Three Decades," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(4), pages 975-1000, December.
    34. Demers, Elizabeth & Lewellen, Katharina, 2003. "The marketing role of IPOs: evidence from internet stocks," Journal of Financial Economics, Elsevier, vol. 68(3), pages 413-437, June.
    35. Erik P. Gilje & Jerome P. Taillard, 2016. "Do Private Firms Invest Differently than Public Firms? Taking Cues from the Natural Gas Industry," Journal of Finance, American Finance Association, vol. 71(4), pages 1733-1778, August.
    36. Laura Xiaolei Liu & Ann E. Sherman & Yong Zhang, 2014. "The Long-Run Role of the Media: Evidence from Initial Public Offerings," Management Science, INFORMS, vol. 60(8), pages 1945-1964, August.
    37. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    38. Ivashina, Victoria & Sun, Zheng, 2011. "Institutional demand pressure and the cost of corporate loans," Journal of Financial Economics, Elsevier, vol. 99(3), pages 500-522, March.
    39. repec:bla:jfinan:v:53:y:1998:i:1:p:27-64 is not listed on IDEAS
    40. Lowry, Michelle & Schwert, G. William, 2004. "Is the IPO pricing process efficient?," Journal of Financial Economics, Elsevier, vol. 71(1), pages 3-26, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gounopoulos, Dimitrios & Kallias, Antonios & Kallias, Konstantinos & Tzeremes, Panayiotis G., 2017. "Political money contributions of U.S. IPOs," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 19-38.
    2. Oehler, Andreas & Rummer, Marco & Smith, Peter N., 2004. "IPO Pricing and the Relative Importance of Investor Sentiment: Evidence from Germany," Discussion Papers 26, University of Bamberg, Chair of Finance.
    3. Gullapalli, Rachita & Knyazeva, Anzhela, 2020. "Foreign issuers in emerging growth company IPOs," Journal of Multinational Financial Management, Elsevier, vol. 54(C).
    4. Butler, Alexander W. & Keefe, Michael O'Connor & Kieschnick, Robert, 2014. "Robust determinants of IPO underpricing and their implications for IPO research," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 367-383.
    5. Agathee, Ushad Subadar & Sannassee, Raja Vinesh & Brooks, Chris, 2012. "The underpricing of IPOs on the Stock Exchange of Mauritius," Research in International Business and Finance, Elsevier, vol. 26(2), pages 281-303.
    6. Grammenos, Costas Th. & Papapostolou, Nikos C., 2012. "US shipping initial public offerings: Do prospectus and market information matter?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(1), pages 276-295.
    7. Guo, Yang & Li, Lily Yuanzhi & Zhong, Hongda, 2025. "Bigger pie, bigger slice: liquidity, value gain, and underpricing in IPOs," Journal of Financial Markets, Elsevier, vol. 72(C).
    8. Jeppsson, Hans, 2018. "Initial public offerings, subscription precommitments and venture capital participation," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 650-668.
    9. Goergen, Marc & Gounopoulos, Dimitrios & Koutroumpis, Panagiotis, 2021. "Do multiple credit ratings reduce money left on the table? Evidence from U.S. IPOs," Journal of Corporate Finance, Elsevier, vol. 67(C).
    10. Kanagaretnam, Kiridaran & Lee, Jimmy & Lim, Chee Yeow & Lobo, Gerald J., 2022. "Trusting the stock market: Further evidence from IPOs around the world," Journal of Banking & Finance, Elsevier, vol. 142(C).
    11. Riccardo Ferretti & Antonio Meles, 2010. "Underpricing, wealth loss for pre-existing shareholders and the cost of going public: the role of private equity backing in Italian IPOs," Venture Capital, Taylor & Francis Journals, vol. 13(1), pages 23-47, September.
    12. Patrick M. Corrigan, 2022. "Does an initial public offering (IPO) issuer's Securities and Exchange Commission registration fee calculation method predict pricing revisions and IPO underpricing?," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 19(4), pages 1114-1147, December.
    13. Wang, Liying, 2021. "Lifting the veil: The price formation of corporate bond offerings," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1340-1358.
    14. Bajo, Emanuele & Chemmanur, Thomas J. & Simonyan, Karen & Tehranian, Hassan, 2016. "Underwriter networks, investor attention, and initial public offerings," Journal of Financial Economics, Elsevier, vol. 122(2), pages 376-408.
    15. Eom, Chanyoung, 2018. "Institutional bidding behaviors during IPO bookbuilding: Evidence from Korea," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 413-427.
    16. Drivas, Kyriakos & Gounopoulos, Dimitrios & Konstantios, Dimitrios & Tsiritakis, Emmanuel, 2018. "Trademarks, Firm Longevity and IPO Underpricing," MPRA Paper 89430, University Library of Munich, Germany.
    17. Natalia Matanova & Tanja Steigner & Bingsheng Yi & Qiancheng Zheng, 2019. "Going concern opinions and IPO pricing accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 195-238, July.
    18. Klova, Valeriia, 2017. "IPO underpricing: What about the shipping sector?," Journal of Multinational Financial Management, Elsevier, vol. 42, pages 95-115.
    19. Feng, Xunan & Johansson, Anders C. & Wei, Dengxi, 2023. "Judging a book by its cover: Analysts and attention-driven price patterns in China's IPO market," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    20. Reber, Beat, 2017. "Does mispricing, liquidity or third-party certification contribute to IPO downside risk?," International Review of Financial Analysis, Elsevier, vol. 51(C), pages 25-53.

    More about this item

    Keywords

    IPO; Underpricing; Syndicated loans; Loan spreads; Borrowing costs;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinin:v:61:y:2025:i:c:s1042957324000603. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622875 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.