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Federal Reserve Bank of San Francisco
Working Paper Series
Financial contracting and the choice between private placement and publicly offered bonds
Simon H. Kwan
Willard T. Carleton
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.


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Simon H. Kwan & Willard T. Carleton, Financial contracting and the choice between private placement and publicly offered bonds, Federal Reserve Bank of San Francisco, Working Paper Series 2004-20, 2004.
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Keywords: Finance ; Corporate bonds
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