Private Ownership and the Cost of Public Debt: Evidence from the Bond Market

Brad A. Badertscher, Dan Givoly, Sharon P. Katz, Hanna Lee
2018 Management science  
Using a sample of public bonds issued by privately-owned and publicly-owned companies we find that, after controlling for financial fundamentals and information environment effects, the cost of public debt issued by privately-owned companies as captured by ratings and yield spreads is significantly higher than that issued by publicly-owned companies. This higher cost, however, is justified, but only in part, by higher than expected actual rates of default among privatelyowned firms. Among
more » ... ely-owned companies, the cost of debt is higher for companies controlled by private equity (PE) firms. However, ownership by large PE firm reduces the cost of debt to their investees as compared to those owned by smaller PE firms. The results contribute to our understanding of the costs of public versus private ownership and our knowledge on the role of ownership type and "soft" information in bond valuation.
doi:10.1287/mnsc.2017.2935 fatcat:baikhhca4fbybiimslmcsvei5y