Information Asymmetry, Monitoring, and the Placement Structure of Corporate Debt

Abstract

We empirically examine the impact of flotation costs, agency conflicts, regulation, and information asymmetries on a firm's mix between public and privately placed debt. Our results indicate that larger firms and firms with larger issue sizes exploit the scale economies in flotation costs of public debt, and so have lower proportions of private debt. We also find that firms that have higher contracting costs due to moral hazard, such as firms with more growth options, have higher proportions of private debt. However, our evidence provides only limited support for the view that private debt mitigates the contracting costs associated with adverse selection. Although we find that firms that operate under a greater degree of information asymmetry rely more on private debt, we find little evidence that firms with favorable private information about future profitability choose more private debt. We do however, find weak evidence that of the firms with favorable information about future profitability, those that are also subject to a high degree of information asymmetry rely more on private debt.