Takeover Exposure, Agency, and the Choice between Private and Public Debt

46 Pages Posted: 25 Sep 2008 Last revised: 26 Jul 2013

See all articles by Matteo P. Arena

Matteo P. Arena

Marquette University

John S. Howe

University of Missouri at Columbia - Department of Finance

Date Written: September 24, 2008

Abstract

This study examines how governance characteristics are related to the corporate choice between public debt and different forms of private debt. We find that firms with fewer takeover defenses and larger outside blockholder ownership are more likely to issue private debt. We also document that the cost of public debt is more sensitive to the degree of takeover exposure than the cost of bank debt. These results are consistent with the hypothesis that banks mitigate the expected negative impact of takeovers on debtholder value by enforcing restrictive covenants and by renegotiating the debt contract in case of a change in control of the borrowing firm. The results of this study are also consistent with the conjecture that firms more exposed to takeovers are more likely to issue speculative-grade debt in the 144A market than to rely on public debt. Moreover, we show that firms characterized by weaker internal monitoring are less likely to borrow from banks, consistent with the view that managers of firms with greater agency problems avoid bank monitoring to maintain perquisite consumption.

Keywords: Private debt, Public debt, Corporate governance, Takeover defenses

JEL Classification: G32, G34, G21

Suggested Citation

Arena, Matteo P. and Howe, John S., Takeover Exposure, Agency, and the Choice between Private and Public Debt (September 24, 2008). Journal of Financial Research, 2009. Available at SSRN: https://ssrn.com/abstract=1273077

Matteo P. Arena (Contact Author)

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States

John S. Howe

University of Missouri at Columbia - Department of Finance ( email )

224 Middlebush Hall
Columbia, MO 65211
United States
573-882-5357 (Phone)
573-884-6296 (Fax)

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