Private Versus Public Debt: Evidence from Firms that Replace Bank Loans with Junk Bonds
40 Pages Posted: 21 Dec 1998
Date Written: October 1998
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: Suggested Citation