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Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing

Published online by Cambridge University Press:  10 March 2016

Rongbing Huang ,
Jay R. Ritter  and
Donghang Zhang
Rongbing Huang
Affiliation:
rhuang1@kennesaw.edu, Kennesaw State University, Coles College of Business, Kennesaw, GA 30144
Jay R. Ritter*
Affiliation:
jay.ritter@warrington.ufl.edu, University of Florida, Warrington College of Business Administration, Gainesville, FL 32611
Donghang Zhang
Affiliation:
zhang@moore.sc.edu, University of South Carolina, Moore School of Business, Columbia, SC 29208.
*
*Corresponding author: jay.ritter@warrington.ufl.edu
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Abstract

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 with 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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 29 - 54
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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