The Private Premium in Public Bonds

Abstract

This paper is the first to document the presence of a private premium in public bonds. We find that spreads are 30 basis points higher for public bonds of private companies than for bonds of public companies, even after controlling for observable differences, including rating, financial performance, industry, bond characteristics, liquidity and issuance timing. The estimated private premium increases to 40 to 56 basis points when a propensity matching methodology is used or when we control for fixed issuer effects. In contrast, in the same sample, there is no difference in pricing in private debt (syndicated loans). Despite the premium pricing, bonds of private companies are no more likely to decline in price, default or be downgraded than are public bonds. We conclude that the cost of information may be different across segments of the debt market.

Keywords: bonds, private, private equity

JEL Classification: G12, G14, G32