Prior Debt and the Cost of Going Public

Previous studies find that firms with prior debt, particularly publicly rated, have lower information asymmetry and experience a lower opportunity cost of going public, as measured by underpricing. Subsequent research suggests that underpricing may be an inaccurate measure of indirect issuance costs. Thus, we replicate and extend existing studies to examine whether previously issued debt reduces the true opportunity cost of issuance. We find that private debt issues have little effect; however, firms with public debt (particularly rated) have both significantly lower levels of underpricing and lower issuance opportunity costs, as well as narrower filing ranges and smaller price revisions, all of which are consistent with reduced asymmetry. We find, however, that matching issues by firm size eliminates the significant relations. Thus, we conclude that although prior public debt appears to reduce information asymmetries, it is more likely a reflection of the underlying characteristics of firms with these existing securities.