The private-placement debt decision: An empirical analysis

We examine empirically the relationship between debt source and several of the borrowing firm's characteristics as implied by recent theories in finance. In particular, we examine the choice between private placements and public bonds, given the characteristics of the borrowing firms such as leverage, firm age, firm size, availability of investment opportunities, and information proprietorship. The results indicate the significance of information asymmetry problems and economies of scale in determining a borrowing firm's choice of debt sources. The proxy for proprietary information is not a significant factor affecting the locus of borrowing. Most of the theoretical predictions receive support in the estimation, although there is only weak evidence in favor of the role of the scale of future investment opportunities.;In addition, the results indicate a notable difference between investment-grade and junk-bond rated firms. Conditioned on firm size and other characteristics, we find that junk-bond rated firms are significantly more likely to issue private placements. This implies that private placement lenders (which typically are insurance companies) play a role similar to banks in that they are able to identify "good" borrowers even among those firms that have been rated as low credit quality issuers. In other words, the private placement market tends to serve ex ante riskier borrowers.