Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds

FRB of San Francisco Working Paper No. 2004-20

43 Pages Posted: 29 Dec 2004

See all articles by Simon H. Kwan

Simon H. Kwan

Federal Reserve Bank of San Francisco

Willard T. Carleton

University of Arizona

Date Written: November 2004

Abstract

Private placement bonds have unique financial contracting in controlling borrower-lender agency conflicts due to direct monitoring and the relative ease of future renegotiation. Our data show that private placements are more likely to have restrictive covenants and are more likely to be issued by smaller and riskier borrowers. We find the determinants of bond yield spreads to be quite different between private placements and public issues, reflecting the different institutional arrangements between the two markets. Finally, in issuing bonds, we find that firms self-select the bond type to minimize both the financing costs and the transaction costs.

Keywords: Corporate bonds

Suggested Citation

Kwan, Simon H. and Carleton, Willard T., Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds (November 2004). FRB of San Francisco Working Paper No. 2004-20. Available at SSRN: https://ssrn.com/abstract=631846 or http://dx.doi.org/10.2139/ssrn.631846

Simon H. Kwan (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3190 (Phone)

Willard T. Carleton

University of Arizona

Department of History
Tucson, AZ 85721
United States

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