Private Versus Public Debt: Evidence From Firms That Replace Bank Loans With Junk Bonds

40 Pages Posted: 21 Dec 1998  

Stuart C. Gilson

Harvard Business School - Finance Unit

Jerold B. Warner

University of Rochester – Simon Business School

Date Written: October 1998

Abstract

We study firms that reduced private debt by repaying bank loans with proceeds from junk bonds. The debt contracts differ dramatically, and the contractual restrictions in bank debt are tighter. Sample firms are profitable, but experience operating earnings declines just prior to the junk bond issues. The earnings declines further tighten restrictions in bank debt, and the firms have limited borrowing capacity under their existing bank revolvers. Our tests indicate that bank debt paydowns enabled the firms to maintain their ability to grow rapidly. Alternative explanations for the paydowns, such as managers' desire to avoid bank monitoring, have little support.

JEL Classification: G32

Suggested Citation

Gilson, Stuart C. and Warner, Jerold B., Private Versus Public Debt: Evidence From Firms That Replace Bank Loans With Junk Bonds (October 1998). Available at SSRN: https://ssrn.com/abstract=140093 or http://dx.doi.org/10.2139/ssrn.140093

Stuart C. Gilson (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
(617) 495-6243 (Phone)
(617) 496-8443 (Fax)

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

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