The impact of banking relationships on the firm's cost of debt and equity

The first paper in this dissertation argues that the firm's cost of equity in an IPO can be significantly reduced if the issuing firm has a previously established relationship with a potential IPO underwriter. I test this using a new and unique dataset, in which the firm's banking relationships established prior to the IPO are compared to the underwriting institutions managing the firm's new issue. The estimation results show that firms with a lending relationship with a prospective IPO underwriter face a cost of equity capital that is 16 percent lower than that of firms without banking relationships with potential underwriters. For firms with a relationship with a bank that previously managed a debt issue for the firm, the cost of equity is about 7 percent lower compared to that of firms without a previously established relationship with potential underwriters. These results are robust to the firm's endogenous selection of banking institution prior to the firm's IPO.; The purpose of the second paper is to empirically study the effects of going public on the firm's credit contracts. The fact that the cost of funds drops following the firm's IPO is consistent with an information spillover hypothesis in a competitive lending market but it is also consistent with an increased competitiveness in the lending market. Following the firm's IPO, information about the firm is disclosed, which lowers the cost of gathering information which lending banks incur in order to grant loans. This drop in the cost of funds to providers of capital lowers the entry barrier in the lending market. This increased competition amongst potential lenders drives down the cost of funds to firms. So it need not be just the information spillover per se in a competitive lending market that makes the cost of funds drop for borrowing firms; it might be the increased competitiveness in the lending market brought about by lower entry barrier in the lending market. This paper considers this last hypothesis. The results are consistent with an increase in the competitiveness of the lending market following the IPO.