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The Decision to First Enter the Public Bond Market: The Role of Firm Reputation, Funding Choices, & Bank Relationships


Galina Hale


Federal Reserve Bank of San Francisco

João A. C. Santos


Federal Reserve Bank of New York

November 30, 2004

Yale ICF Working Paper No. 04-47

Abstract:     
This paper uses duration analysis to investigate the timing of firms' decision to first access the public bond market. We find that, consistent with Diamond's (1991) model, reputation has a non-monotonic effect on the timing of firms' first public bond issue: firms with the highest and lowest reputation enter the public bond market earlier than firms with intermediate reputation. We also find that, controlling for reputation, issuing a private bond or taking out a syndicated loan speeds up firms' entry to the public bond market. Among the firms that issue private bonds, those that select as an underwriter for their first public bond issue a bank that bought their prior private placements are able to access the public bond market faster than those which do not capitalize on these relationships. In contrast, the relationships that firms develop with banks when they borrow in the syndicated loan market do not affect the timing of their access to the public bond market. Finally, our results show that entry in the public bond market is important in that it lowers the cost of raising external funding subsequently in both the private bond market and the syndicated loan market.

Number of Pages in PDF File: 47

Keywords: bond financing, reputation, bank relationships, duration analysis

JEL Classification: G24, G32

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Date posted: December 6, 2004  

Suggested Citation

Hale, Galina and Santos, João A. C., The Decision to First Enter the Public Bond Market: The Role of Firm Reputation, Funding Choices, & Bank Relationships (November 30, 2004). Yale ICF Working Paper No. 04-47. Available at SSRN: http://ssrn.com/abstract=630601

Contact Information

Galina Hale (Contact Author)
Federal Reserve Bank of San Francisco ( email )
101 Market Street
San Francisco, CA 94105
United States
415-974-3131 (Phone)
415-974-2168 (Fax)
HOME PAGE: http://www.sf.frb.org/economics/economists/index.html
João A. C. Santos
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)
HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML
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