This paper investigates the information mechanism of bank loans in initial public offerings. We examine IPOs for non-financial firms listed in the Taiwan Stock Exchange from 1985 through 1995. There is no significant relation between the amount of bank loans and initial returns. Underpricing is higher in cases where the lending banks serve as the underwriter for the issuer than that in cases where the lending banks are not the underwriter. The result is more profound for small issuers than for large issuers. Moreover, when using networth as the proxy for bank reputation, underpricing is negatively associated with bank reputation.
Whether an issuer has bank loans prior to going public or not does not materially affect firm value. However, firm value is negatively related with the ratio of long-term loans to total asset. Furthermore, firm value is negatively associated with the number of banks involved.
