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

Brad A. Badertscher (), Dan Givoly (), Sharon P. Katz () and Hanna Lee ()
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Brad A. Badertscher: University of Notre Dame, Notre Dame, Indiana 46556
Dan Givoly: Penn State University, University Park, Pennsylvania 16802
Sharon P. Katz: INSEAD, 77300 Fontainebleau, France
Hanna Lee: University of Maryland, College Park, College Park, Maryland 20742

Management Science, 2019, vol. 65, issue 1, 301-326

Abstract: A number of studies have examined the effect of public and private ownership on the cost of debt and concluded that the cost of debt of privately owned firms is higher, driven mainly by the poorer information environment in which these firms operate. We extend this strand of research in two ways. First, we identify and empirically establish the mechanisms that bring about a higher cost of debt to privately owned firms—namely, the limited access that these firms have to the equity capital market, their high rate of management and private-equity ownership, and their less conservative reporting. Second, we improve the reliability of the estimates of the effect of ownership type on the cost of debt by controlling for the different information environments in which privately and publicly owned firms operate. This is accomplished through the use of a sample consisting of publicly owned and privately owned firms that have public debt and are therefore subject to identical reporting and disclosure requirements. Certain data and design features allow us to better control for other factors that might lead to the observed difference in the cost of debt between the two groups of firms. The results contribute to our understanding of the role of ownership type on the cost of capital.

Keywords: public firms; private firms; cost of debt; bond valuation; credit rating (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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