Working Paper

The role of private placement debt issues in corporate finance


Abstract: Private placement debt issues are more effective than public bonds in resolving information asymmetries and controlling moral hazard problems. Firms that issue only private placements (non-switchers) are found to have more information problems than firms that have access to the public bond market (switchers), and therefore are required to pay more for their private placements. Moreover, switchers switch to private placements when the financing situation involves material information asymmetry that is unsuitable for issuing public bonds. For general purposes financing, switchers switch to private placements when the issue size is small, apparently to minimize transaction costs.

Keywords: Debt; Corporations - Finance; Securities;

Authors

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1995

Number: 95-13