Private Equity Firms' Reputational Concerns and the Costs of Debt Financing
Economics, Finance, & Quantitative Analysis
A popular view is that private equity (PE) firms tend to expropriate other stakeholders of their portfolio companies. Bonds offered during 1992-2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by PE-backed companies are on average 70 basis points lower, holding other things constant. We also find that PE-backed companies have more conservative investment and dividend policies after bond offerings compared to non-PE-backed companies. These results suggest that PE firms’ reputational concerns dominate their wealth expropriation incentives and help their portfolio companies reduce the costs of debt.
Huang, Rongbing and Ritter, Jay R. and Zhang, Donghang, Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing (February 20, 2014). http://dx.doi.org/10.2139/ssrn.2205720