مقاله سال ۲۰۱۷

An article by the Bank of England in 2011 shows that there has been a large increase in first-time bond issuance by UK companies during the recent crisis.1 While first-time non-convertible issuers decreased in number with the financial crisis in 2007, the number of first-time non-convertible bond issuers rose in 2008 and 2009.2 The reasons and consequences of such a financing decision remain an open question. This paper assesses how private and public companies trade off the costs and benefits of entering the public bond market when they decide to issue public bonds for the first time. Unlike previous studies (e.g., Denis and Mihov, 2003; Hale and Santos, 2008), I test the impact of f asymmetric information and underinvestment costs on firms’ decision to enter the public bond market. To test my hypotheses, the hand-collected data from prospectuses is also used to assess whether such a decision can be predicted at the IPO date, and to identify the firms that came to the market specifically to raise debt and equity capital, which is considered to be one of the major motivations for public capital market listings (e.g., Pagano et al., 1998).

This paper contributes to the existing literature in several ways. Firstly, the empirical literature on firms’ choices of external funding predominantly investigates the decision to go public through equity IPOs. Studies on going public have devoted little attention to the alternative source of going public, which is the decision to tap the public bond market. In particular, unlike previous studies, this paper includes private companies in order to investigate the different decision of entering the public market, the choice between bond- and equity-IPOs, and uses public companies to analyse the decision between bond-IPOs and issuance of further equity financing during their quotation life, which have not been investigated in the literature. However, my results are related to previous studies that analyse the choice of bank, non-bank, or public debt (Blackwell and Kidwell, 1988; Denis and Mihov, 2003; Hale and Santos, 2008). The recent study by Hale and Santos (2008) investigates new public bond financing in the US. They find that firms with developed bank relationships and established track records enter the public bond market earlier than their counterparts. Denis and Mihov (2003) find the significant impact of credit quality on external borrowing, suggesting that firms with the highest credit quality borrow from public sources while those with the lowest credit quality borrow privately. These studies do not distinguish in depth between the choice of new debt and equity. Unlike previous studies, this paper tests the impact of asymmetric information and agency conflicts between shareholders and debt-holders on firms’ decisions to enter the public bond market.

Secondly, in contrast to existing studies which are US-based, this paper analyses the UK market. It is of particular interest to examine corporate external financing in a country with a market-oriented environment similar to that of the US, but with different institutional settings with stronger creditor rights (see La Porta et al., 1997; Djankov et al., 2007).3 Finally, this paper attempts to control for market conditions, and is thus one of the first studies to investigate the decision to go to the public bond market during the financial crisis, which is highly important for firms’ decisions to enter the public market. This paper documents several new findings. Unlike previous studies (e.g. Hale and Santos, 2008), I find that the agency cost in the form of underinvestment problems delays a firm’s entry to the public bond market, suggesting that high-growth firms wait longer to issue their first public bonds. The results for private companies show that, although high-growth companies are less likely to issue their first public bonds, they tend to follow the pecking order theory, and hence have higher incentives to issue their first public bonds before going to the equity market, supporting the asymmetric information hypothesis. However, high-growth public companies prefer to raise equity capital, delaying their decision to enter the public bond market to resolve the underinvestment problem.