The Valuation Effect of IPOs: Evidence from the Bond Market

This paper examines the excess bond return in a sample of IPO announcements from 1983-2007 for firms with publicly trade debt. The main finding is that IPO announcements create a positive abnormal bond return. This finding is not driven by reverse LBOs, venture backing, spinoffs or by a reduction in leverage. This is the first paper to document a valuation effect of IPOs, which provides important new evidence on the motivation behind the decision to go public. The result is consistent with the investment and information aggregation theories and inconsistent with the market timing and diversification theories of IPOs.