Why Do Public Firms Issue Private and Public Securities?
Armando R. Gomes
Washington University in Saint Louis - John M. Olin Business School
Gordon M. Phillips
Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)
We examine a comprehensive set of public firms' issues of private and public debt, convertibles and common equity securities. The market for public firms issuing private securities is large. Of the over 13,000 issues we examine, more than half are in the private market, with 81\% of small public firms issuing equity and convertibles choosing to issue privately. We find that asymmetric information, in particular, plays a large role in the public versus private market choice and the security type choice. Conditional on issuing in the public market, firms' predicted probability of issuing equity declines and issuing debt increases with measures of asymmetric information. We find a reversal of this sensitivity in the private market, firms' probability of issuing debt slightly declines with measures of asymmetric information. We also find large differences in the sensitivity of security issue decisions to market timing and trade-off variables in public and private markets.
Number of Pages in PDF File: 52
Keywords: Capital structure, financial structure, debt, equity, public, private
JEL Classification: G24, G32, G3
Date posted: March 17, 2005