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  5. Access to Capital Markets: Firm Entry and Growth
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Access to Capital Markets: Firm Entry and Growth

Paper Session

Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)

Sheraton New Orleans, Rhythms III
Hosted By: American Finance Association
  • Chair: Michelle Lowry, Drexel University

SPAC IPOs and Sponsor Network Centrality

Chen Lin
,
University of Hong Kong
Fangzhou Lu
,
University of Hong Kong
Roni Michaely
,
University of Hong Kong
Shihua Qin
,
University of Hong Kong

Abstract

The structure of a special purpose acquisition company (SPAC) provides a special role
for its sponsors. We show that while few characteristics can explain SPACs' returns, sponsors' connections and network, measured by their centrality, explain a large portion of return variation in the cross-section. A one standard deviation increase in sponsors' network centrality leads to a 3.5% higher merger and acquisition success probability and a 1.8% higher post-merger monthly abnormal return. We attribute this outperformance of firms with high network centrality to superior deal sourcing and fundraising abilities. Overall, we show that the network connections of the SPAC management teams can add value to SPACs' deals despite the general underperformance of SPACs after business combinations.

The Effects of Going Public on Firm Performance and Commercialization Strategy: Evidence from International IPOs

Borja Larrain
,
Pontifical Catholic University of Chile
Gordon Phillips
,
Dartmouth College and NBER
Giorgo Sertsios
,
University of Wisconsin-Milwaukee
Francisco Urzua
,
University of London

Abstract

We study the effects of going public using a unique panel of firms in 16 European countries for which we observe financial data before and after firms' initial-public-offering (IPO) attempts. We compare firms that complete their IPO with firms that withdraw their IPO. We instrument the going public decision using prior market returns. We find that firm profitability goes up after going public - contrary to previous results in the literature. We also find a post-IPO expansion in the number of subsidiaries and countries in which IPO firms operate. The increase in profitability is stronger for firms in financially dependent industries and in countries with higher investor protection consistent with going public relaxing financial constraints and with a stronger impact when agency conflicts are lower. Overall, our results are consistent with going public inducing a shift towards a strategy of commercialization to increase profitability

Access to Debt and the Provision of Trade Credit

Matthew Billett
,
Indiana University
Kayla Freeman
,
University of Georgia
Janet Gao
,
Indiana University

Abstract

We examine the effect of improved access to debt markets on firms' provision of trade credit. Using hand-collected, granular trade credit data between U.S. public firms, we show that increased access to credit strengthens a firm's bargaining power relative to major customers and reduces their incentives to provide trade credit to those customers. We establish causality using the staggered passage of anti-recharacterization laws that expanded firms' debt capacity. Customer-dependent firms cut trade credit more, especially towards financially healthier customers. The reduced trade credit leads customers to cut investment, increase leverage, and scale back trade credit provision to firms further downstream.

Entry Along the Supply Chain: Removing Growth Restrictions on Firms in India

Chhavi Rastogi
,
University of Bonn

Abstract

I study the spillover effects of removing barriers to growth in one product market on entry and growth of firms in the downstream market. Firms that are constrained produce low quality goods and, in turn, constrain the downstream market. I exploit the repeal of product reservation in India, whereby hundreds of products stop being reserved for exclusive production by small firms. With a more efficient input market, entry in the downstream product market increases with no observable decline in quality of entrants. Productive downstream firms grow and less productive ones shrink. My results imply that business dynamism has positive spill-over effects along the supply chain.

Discussant(s)
Tim Jenkinson
,
University of Oxford
Tania Babina
,
Columbia University
Jean-Noel Barrot
,
HEC Paris
Hadiye Aslan
,
Georgia State University
JEL Classifications
  • G3 - Corporate Finance and Governance