Evidence on the costs and benefits of bond IPOs

database. The authors also thank Alex Vogenthaler and Becky Trubin for outstanding research assistance. The views stated herein are those of the authors and are not necessarily the views of the Federal Reserve Banks of San Francisco or New York, or the Federal Reserve System. Evidence on the costs and benefits of bond IPOs This paper investigates whether it is costly for non–financial firms to enter the public bond market, and whether firms benefit from their bond IPOs. We find that both gross spreads and ex-ante credit spreads are higher for IPO bonds, suggesting that firms pay higher underwriting costs on their first public bond. We also find that underpricing in the secondary market is higher for IPO bonds, further suggesting that it is costly to enter the public bond market. The costs of entering the public bond market are economically meaningful and are higher for risky firms. We investigate the benefits from entering the public bond market, by looking at the costs firms pay to raise external funding subsequently to their bond IPOs. Our results show that these benefits exist, but they accrue only to safe firms. These firms benefit from a reduction both in the interest rates they pay on bank loans and the costs they incur to issue private bonds after they enter the public bond market. Together with our the previous findings, these results lend support to the thesis that bond IPOs are unique.