Risk Disclosure and the Pricing of Corporate Debt Issues in Private and Public Markets

Abstract

We exploit the unique features of the Rule 144A exchange bond market, identical bonds with similar disclosure, first issued in the Rule 144A private market and then registered and traded in the public market, to examine whether risk disclosure is informative for the pricing of debt offerings. We find that the offering terms in the private primary market, the credit rating and the offering's initial yield spread, are related to risks disclosed in the registration statement. Secondary market yield spreads are more sensitive to risk disclosures when the bond is traded in the public market than in the Rule 144A private market. However, the effect of disclosure on bond outcomes is similar for both SEC-registered (public) and private firms. Our findings suggest regulatory requirements and legal restrictions on disclosure in the public market can spillover into the private market.

Keywords: Debt IPO, Risk Factor, Topic Analysis, Credit Risk, Textual Analysis

JEL Classification: G0