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Private Ownership and the Cost of Public Debt: Evidence from the Bond Market

Management Science, Forthcoming

65 Pages Posted: 17 Jan 2015 Last revised: 22 Aug 2017

Brad A. Badertscher

University of Notre Dame

Dan Givoly

Pennsylvania State University, Smeal College of Business

Sharon P. Katz

Columbia Business School - Accounting, Business Law & Taxation

Hanna Lee

University of Maryland - Robert H. Smith School of Business

Date Written: August 21, 2017

Abstract

A number of studies have examined the effect of public and private ownership on the cost of debt and conclude that the cost of debt of privately owned firms is higher, driven mainly by the poorer information environment in which these firms operate. We extend this strand of research in two ways. First, we identify and empirically establish the mechanisms that bring about a higher cost of debt to privately-owned firms, namely the limited access that these firms have to the equity capital market, their high rate of management and private-equity ownership, and their less conservative reporting. Second, we improve the reliability of the estimates of the effect of ownership type on the cost of debt by controlling for the different information environments in which privately- and publicly-owned firms operate. This is accomplished through the use of a sample consisting of publicly-owned and privately-owned firms that have public debt and are therefore subject to identical reporting and disclosure requirements. Certain data and design features allow us to better control for other factors that might lead to the observed difference in the cost-of-debt between the two groups of firms. The results contribute to our understanding of the role of ownership type on the cost of capital.

Keywords: public firms, private firms, cost of debt, bond valuation, credit rating

JEL Classification: G30, G32, G33, M41

Suggested Citation

Badertscher, Brad A. and Givoly, Dan and Katz, Sharon P. and Lee, Hanna, Private Ownership and the Cost of Public Debt: Evidence from the Bond Market (August 21, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2550300 or http://dx.doi.org/10.2139/ssrn.2550300

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Dan Givoly

Pennsylvania State University, Smeal College of Business ( email )

305 Business Building
University Park, PA 16802
United States
814-865-0587 (Phone)
814-863-8393 (Fax)

Sharon P. Katz

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Hanna Lee (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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