BANK LENDING AND INITIAL PUBLIC OFFERINGS

In this paper we test the hypothesis that banking relations are a signal about firm value. We argue that bank processing of asymmetric information and external monitoring of corporate activities reduce the ex ante uncertainty of investors about firm value. We demonstrate that the existence of bank debt and/or lines of credit lowers the expected initial return associated with initial public offerings. The empirical results are robust with respect to the inclusion of variables which reflect other mechanisms that can ameliorate ex ante uncertainty. Our work adds to the body of evidence that supports the hypothesis that intermediaries provide valuable asset services to corporate borrowers. © 1990.