Securities Laws and the Choice between Loans and Bonds for Highly Levered Firms

Fisher College of Business Working Paper No. 2019-03-01

Charles A. Dice Center Working Paper No. 2019-1

65 Pages Posted: 12 Jan 2019

See all articles by Robert Prilmeier

Robert Prilmeier

Tulane University - A.B. Freeman School of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 7, 2019

Abstract

In contrast to bonds, levered loans do not require SEC registration. We show that this distinction plays an important role in firms’ choice between funding through loans and bonds and helps understand why the market share of cov-lite loans has increased so much. Compared to cov-heavy loans, cov-lite loans are close substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans. SEC-reporting firms that borrow using cov-lite loans are more likely to deregister subsequently. Non-reporting firms are more likely to borrow through highly levered loans than through bonds, even though maturities, amounts, covenants, and ratings are similar between the two sources of funding. As expected from theory, we find that the liquidity advantage of cov-lite loans over cov-heavy loans is highest for non-registered issuers where information asymmetries are greater.

Keywords: Debt contracting, covenants, securities laws, regulation, loan trading

JEL Classification: G32, G18, G23, D82

Suggested Citation

Prilmeier, Robert and Stulz, Rene M., Securities Laws and the Choice between Loans and Bonds for Highly Levered Firms (January 7, 2019). Fisher College of Business Working Paper No. 2019-03-01. Available at SSRN: https://ssrn.com/abstract=3314270 or http://dx.doi.org/10.2139/ssrn.3314270

Robert Prilmeier

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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