We show that initial public offerings (IPOs) have nontrivial positive spillover effects on local labor markets, business environments, consumer spending, real estate, and migration. We mitigate endogeneity concerns about unobserved heterogeneity with restrictive geographic fixed effects coupled with a matching procedure. We show that it is the listing decision, which encompasses both a wealth and liquidity shock, that induces economic spillovers. Conditional on an IPO occurring, we estimate that an additional $10 million in IPO proceeds is associated with an extra 41 jobs and 0.7 new establishments locally.
I investigate whether restrictive loan covenants disrupt or improve firms’ operating performance. Using an instrumental variables approach to address the endogenous relationship between covenant strictness and firms’ efficiency, I find that stricter loan covenants lead to an increase in profitability and firm value even when firms do not violate a covenant. Stricter covenants improve performance only in firms with managerial agency conflicts: those without large shareholder ownership, facing softer competition in their product market, or with weaker shareholder rights. The evidence suggests that by designing stringent contracts ex ante, creditors create positive externalities in poorly governed firms through managerial incentives.
Received December 7, 2018; editorial decision May 31, 2019 by Editor Uday Rajan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.