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The private premium in public bonds

Anna Kovner and Chenyang Wei ()

No 12-7, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper is the first to document the presence of a private premium in public bonds. We find that spreads are 31 basis points higher for public bonds of private companies than for bonds of public companies, even after controlling for observable differences, including rating, financial performance, industry, bond characteristics and issuance timing. The estimated private premium increases to 40 to 50 basis points when a propensity matching methodology is used or when we control for fixed issuer effects. Despite the premium pricing, bonds of private companies are no more likely to default or be downgraded than are public bonds. They do not have worse secondary market performance or higher CDS spreads nor are they necessarily less liquid. Bond investors appear to discount the value of privately held equity. The effect does not come only from the lack of a public market signal of asset quality, because very small public companies also pay high spreads.

Keywords: Bonds; -; Prices (search for similar items in EconPapers)
Date: 2012, Revised 2012
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Working Paper: The Private Premium in Public Bonds? (2012) Downloads
Working Paper: The private premium in public bonds (2012) Downloads
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