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

58 Pages Posted: 17 Jan 2015 Last revised: 21 Apr 2015

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: January 15, 2015

Abstract

Using a sample of public bonds issued by privately-owned and publicly-owned companies we find that, after controlling for financial fundamentals, bond characteristics, and information environment effects, the cost of public debt issued by privately-owned companies as captured by ratings and yield spreads is significantly higher than that issued by publicly-owned companies. This higher cost is justified, but only in part, by higher than expected actual rates of default among privately-owned firms. Among privately-owned companies, the cost of debt is higher for companies controlled by private equity (PE) firms. However, ownership by large PE firm reduces the cost of debt to their investees as compared to those owned by smaller PE firms. The results contribute to our understanding of the costs of public versus private ownership and our knowledge on the role of ownership type and “soft” information in bond valuation.

Keywords: public firms, private firms, cost of debt, bond valuation, credit rating, debt default risk, and bankruptcy

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 Debt: Evidence from the Bond Market (January 15, 2015). Columbia Business School Research Paper No. 15-11; Robert H. Smith School Research Paper No. RHS 2550300. 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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