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
Date Written: November 2004
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
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