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

Posted: 3 Aug 2017

See all articles by Brad A. Badertscher

Brad A. Badertscher

University of Notre Dame

Dan Givoly

Pennsylvania State University, Smeal College of Business

Sharon P. Katz

INSEAD

Hanna Lee

University of Maryland - Robert H. Smith School of Business

Date Written: August 1, 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 difference in the cost of debt between privately- and publicly-owned firms. 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 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, 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 Public Debt: Evidence from the Bond Market (August 1, 2017). Columbia Business School Research Paper No. 17-80. Available at SSRN: https://ssrn.com/abstract=3012015

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 (Contact Author)

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

Hanna Lee

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

College Park, MD 20742-1815
United States

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