Is the cost of equity a mere function of leverage? The case of bond <scp>IPOs</scp>
Bibliographic record
Abstract
Abstract In this paper, we investigate how undertaking a bond IPO influences a firm's cost of equity. Using a sample of nearly 600 firms that have gone through a bond IPO over the 1980–2014 period, we show that the change in the cost of equity that results is not just a function of leverage influencing the risk of residual owners. The information and monitoring environment, and agency relationships of a firm change significantly with its first public debt, and these changes can have a significant impact on the firm's cost of equity. We find that firms that have relatively high information asymmetry before they undertake the bond IPO experience less of a rise in their cost of equity than firms with relatively low information asymmetry consistent with these firms benefitting from improvements in their information environment as a result of the IPO. We also show that firms with high pre‐bond IPO free cash flow see less of an increase in their cost of equity than firms with low pre‐bond IPO free cash flow consistent with the disciplining mechanism of additional debt and the benefit from additional monitoring. In addition, we find that firms with poor corporate governance experience less of an increase in their cost of equity after the bond IPO than firms with better corporate governance. The evidence suggests that the change in the riskiness of equity after a firm goes through a bond IPO is much more complex than what is predicted by the leverage increase.
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.000 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.001 |
| Open science | 0.001 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".