LSE proposes special listing for private firms - But the effects might be limited
The London Stock Exchange (LSE) recently proposed to introduce a special listing for private firms that allows private companies to periodically access public markets. “The companies wouldn’t be subject to the same degree of regulatory oversight as a fully listed company”, as a WSJ article reports, but this new segment would facilitate access to investors and (equity) capital.
The effects for private firms, however, might be limited. A major benefit of being publicly listed - in addition to raising equity - are spillovers into other capital markets, e.g., a reduction in the cost of raising debt finance. Thus, the question is whether private firms now also expect to experience a reduction in their cost of debt if they occasionally raise public equity? Not necessarily. Let me explain!
In “The costs of being private - Evidence from the loan market”, co-authored with Anthony Saunders (NYU Stern) and published in the Review of Financial Studies in 2011, we investigate whether private firms pay higher loan spreads than public firms (after accounting for borrower risk) using a sample of public and private UK borrowers. We first document that private firms pay about 27bps higher loan spreads (which translates into about $0.64 million higher annual costs for private firms).
Where are these cost savings for public firms coming from?
We show that one of the main benefits of being listed is what we call “lower cost of information production” of lenders in debt markets. What does this mean? There is enough information generated in equity markets that is useful for lenders in the loan market. This can happen e.g. through disclosure and listing requirements (when stocks are part of indices) or analyst coverage. We compared loan spreads of firms that are part of the FTSE 100/FTSE 250 index (with high listing and disclosure requirements), firms part of the Small Cap/AIM index (with low listing and disclosure requirements) and private firms. We show that while firms in the FTSE 100/FTSE 250 pay lower loan spreads compared to private firms, firms in the Small Cap/AIM index do not.
Overall, “being public”, i.e., having access to public equity markets in and of itself does not have an impact on firm borrowing cost if not accompanied by listing and disclosure requirements. But access to investors in public equity markets without these requirements is the idea of the special listing proposed by the LSE. Effects - at least on firm borrowing costs - might therefore be limited and depend on the level of disclosure (and oversight) imposed on private companies when accessing public markets.
This is the downloadable working paper version and the online appendix (with a lot of technical details and additional analyses). I hope you find this interesting and please reach out if you have questions.