Donghang Zhang

Managing Underwriters and the Marketing of Seasoned Equity Offerings

Using a sample of 2,281 seasoned equity offerings (SEOs) from 1995 to 2004, we show that the marketing of securities is important to issuers. The number of managing underwriters for an SEO is negatively related to the offer price discount, especially when the relative offer size is large and the stock return volatility is high. Larger investor networks of comanaging underwriters also lower offer price discounts. We argue that the evidence is supportive of the marketing hypothesis: The underwriters’ marketing efforts can lower the offer price discount by shifting up and flattening the demand curve of an SEO.

Why Do IPO Underwriters Allocate Extra Shares when They Expect to Buy Them Back

I argue that overallocation is used as a marketing strategy to increase the offer price and aftermarket price of an initial public offering (IPO). I show that, when there is weak demand, it can be optimal for the underwriter to oversell an issue and take a naked short position. The issuing firm benefits from a higher expected offer price. This is in spite of the fact that, in equilibrium, allocating more shares when there is weak demand requires greater underpricing when there is strong demand.

Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing

A popular view is that private equity (PE) firms tend to expropriate other stakeholders of their portfolio companies. Bonds offered during 1992-2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by PEbacked companies are on average 70 basis points lower, holding other things constant. We also find that PE-backed companies have more conservative investment and dividend policies after bond offerings compared to non-PE-backed companies. These results suggest that PE firms’ reputational concerns dominate their wealth expropriation incentives and help their portfolio companies reduce the costs of debt.

Bank Capital and Lending: Evidence from Syndicated Loans

Using within-loan estimations to remove the impact of the demand side factors, we find that capital levels of banks participating in the same syndicated loan are positively associated with the banks’ contributions to the loan. Consistent with the argument that higher capital helps banks to raise uninsured debt, the positive effect of bank capital on lending is stronger among banks that rely more on wholesale funding. Furthermore, we find that banks increase their contributions to syndicated loans after receiving quasi-exogenous TARP funding. Taken together, we provide new evidence on the importance and the causal effect of bank capital on lending.

Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors

Using a sample of syndicated loans to U.S. IPO companies, we examine how the relationship between the PE sponsor of a borrower’s IPO and the lead bank of the loan influences loan syndicate structure. We find that a stronger PE-bank relationship enables the lead bank to retain a smaller share of the loan and form a larger and less concentrated syndicate, especially when the borrower is less transparent. A stronger PE-bank relationship also attracts greater foreign bank participation. Our findings suggest that the lead bank’s relationship with a third-party financial sponsor of the borrower facilitates information production in lending.