Date of Award

Summer 2019

Document Type

Open Access Dissertation

Department

Moore School of Business

First Advisor

Donghang Zhang

Abstract

This dissertation is composed of three essays on financing decisions by firms. The first essay examines the cost of borrowing in the syndicated loan market for recent IPO firms. We find evidence of informational rent extraction by IPO underwriters that lend to firms after going public. The (informed) lender affiliated to the IPO underwriter on average earns a 5% higher abnormal payoff (interest) than an unaffiliated lender. When these loans commence trading on the secondary market, loans originated by affiliated lenders increase by 97 bps more than loans originated by unaffiliated lenders. Thus, the primary and secondary market evidence supports the hypothesis of informed lenders extracting informational rents from borrowers.

The second essay explores the IPO decisions and the pricing of equity. In a difference-in-difference (DD) framework, I provide causal evidence on the role of financial constraints on the IPO decision and the associated underpricing. I use the adoption of interstate banking laws as an exogenous variation in the availability of bank credit and thereby financial constraints. I find that financially constrained (FC) firms are more likely to pursue an IPO in response to a credit shock, and these FC issuers incur higher issuance costs in the form of higher underpricing. Post-issuance, FC firms exhibit higher investment intensity than Non-Financially Constrained (NFC) firms.

Finally, in the third essay I examine the implication of bundling M&A advisory and deal financing. The payoff to M&A advisers is usually contingent on deal completion but independent of deal outcome. This contractual arrangement may result in an agency problem. I examine whether bundling of M&A advisory and financing mitigates this problem. Consistent with contract theory, I find that buy-side advisers are more likely to finance deals when the agency problem is the most severe i.e., complex deals. These advisers trade off lower advisory fees for higher interest rates. Deal financing by advisers reduces the completion time and elicits a positive response from the market.

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