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The cost of going public and financial constraints

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  • Gerard Pinto

    (University of Delaware)

Abstract

We provide empirical evidence on the bargaining power model proposed in Hu and Ritter (2007) by examining the financial constraints channel on the direct and indirect cost of going public. We find that financially constrained firms possess lower bargaining power and thereby incur higher direct costs (gross spreads) and higher indirect costs (underpricing) in an IPO. Consistent with the bargaining power model, we find that IPOs of financially constrained firms are usually managed by sole bookrunners and underwritten by smaller syndicates. Finally, we find that these financially constrained IPO firms underperform their non-financially constrained IPO peers in the long term. These results are robust to multiple endogeneity tests.

Suggested Citation

  • Gerard Pinto, 2024. "The cost of going public and financial constraints," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 38(4), pages 443-464, December.
    • Handle: RePEc:kap:fmktpm:v:38:y:2024:i:4:d:10.1007_s11408-024-00456-3
    DOI: 10.1007/s11408-024-00456-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Initial public offering (IPO); New list; Securities; Financial constraints; Investment banking;
    All these keywords.

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • 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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