Does the Change in the Information Environment Affect the Choice between Bank Debt and Public Debt?

53 Pages Posted: 1 Dec 2014 Last revised: 18 Apr 2018

See all articles by Xu Li

Xu Li

The University of Hong Kong

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: September 23, 2015

Abstract

Using brokerage mergers and closures as natural experiments, we examine how exogenous changes in the information environment affect a firm’s choice between bank debt and public debt. Our difference-in-differences approach shows that exogenous increases in information asymmetry lead firms to substitute away from public debt towards bank debt, which is consistent with predictions in the theoretical literature that public bondholders are more sensitive than banks to information asymmetry problems. We also demonstrate that the effect of the change in the information environment on a firm’s debt choice is more pronounced for firms with low initial analyst coverage, for firms losing star analysts, and for firms with high asset substitution risk. Importantly, this paper directly tests the underlying assumption behind the theoretical framework by documenting an instantaneous negative bond market reaction, an insignificant change in bank loan spread, a reduced bond issuance and an increased bank loan issuance for firms with analyst loss.

Keywords: Information Environment, Choice between bank debt and public debt, Analyst coverage

JEL Classification: G24, G32

Suggested Citation

Li, Xu and Lin, Chen and Zhan, Xintong, Does the Change in the Information Environment Affect the Choice between Bank Debt and Public Debt? (September 23, 2015). Available at SSRN: https://ssrn.com/abstract=2532121 or http://dx.doi.org/10.2139/ssrn.2532121

Xu Li

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, NT
Hong Kong

HOME PAGE: http://sites.google.com/view/xintongzhan

Register to save articles to
your library

Register

Paper statistics

Downloads
424
Abstract Views
1,695
rank
69,075
PlumX Metrics