Working Papers

Going Public and Bank Monitoring: Evidence from Syndicated Loans. [Job Market Paper]

NHH Brownbag 2018

Going public may influence bank monitoring through a few channels. First, going public improves information transparency of the IPO firm and reduces lender-borrower information asymmetry, thereby lowering the demand of bank monitoring. Second, public firms are subject to strict regulation and more analyst coverage, both of which improve the quality of disclosure, leading to lower monitoring costs and higher supply of monitoring. Third, after going public, dispersed ownership aggravates the free-rider problem, which impedes shareholders’ monitoring over firm decisions. Bank monitoring is thus more desired to reduce managerial agency problems. These three channels have opposite predictions over how going public affects bank monitoring, and it is thus an  empirical issue which channel dominates. In this paper, we examine this issue through studying the use of state-contingent terms in loan contracts, such as performance pricing and loan covenants. These terms, as the key means of bank monitoring, link firm performance to borrowing costs, and help mitigate conflicts of interest between lenders and borrowers. We provide strong evidence of a significant increase in bank monitoring after firms’ going public. This increase is neither driven by the firm life cycle nor by equity increase during IPO, and is robust to various model specifications and identification strategies. Overall, our results support the presence and importance of the second and third channels.

Why Don’t Issuers Get Upset about IPO Underpricing: Evidence from the Loan Market, with Xunhua Su  

AFA 2019  Poster Session (scheduled) | FMA 2018 (scheduled) | CICF 2018 | AsianFA 2018 | Drexel Brownbag 2018 | NHH Brownbag 2018

This paper links IPO underpricing with the benefit of going public from the loan market. We show that IPO underpricing is associated with significantly lower borrowing costs of the issuer after going public. The average reduction in the loan interest spread for firms with abovemedian IPO underpricing is about 23.7% of their pre-IPO loan spreads, which almost doubles the 12.6% reduction for firms with below-median underpricing, after control for firm and loan characteristics, and important factors that affect IPO underpricing. This larger reduction in borrowing costs amounts to about U.S. $0.79 billion per year for our sample firms, which is substantial relative to the total amount of money left on the table due to higher underpricing (U.S. $21.06 billion). Our findings provide a new explanation for why issuers don’t get upset about IPO underpricing. (download)

Passive Investors and Corporate Social Responsibility: a Risk-Management Perspective, with Wenxuan Hou 

FMA 2017 | NFN 2017 | FIBE 2017 | AFBC 2016 | NHH Brownbag 2016

This paper develops a risk-management view of CSR by arguing that CSR provides insurance like effects in adverse corporate events. Since passive investors have diversified away most idiosyncratic risks, we predict that they demand less CSR as a strategic approach to manage risks. Using the annual Russell 1000/2000 index reconstitution as an instrument for passive investor ownership, we find that firms with higher passive fund ownership exhibit significantly lower CSR engagement. The effects are more pronounced among better-diversified passive investors and firms that are not in CSR-sensitive industries. We also find that passive investors hold back CSR activities through the channel of “voice” by reducing the number of socially responsible investment (SRI) proposals. Overall, the findings shed light on the risk-management function of CSR and provide original evidence that passive investors imprint their preference on firm policy. (download)

Product Market Threats and M&A Payment Methods

Firms facing higher product market threats prefer stock payment to cash payment in M&As, supporting that firms use cash as precautionary savings to capture future valuable investment opportunities.

Work in Progress 

  • “Cyberattacks and Loan Contracting” …
  • “Do Stock Investors Learn from Loan Underpricing?” …