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The Information Content of Private Debt Placements

Authors


  • They acknowledge financial support from the University at Albany and University of Kentucky (Chandra), and the Hans Julius Bär Endowed Chair (Nayar). Able research assistance was provided by Srinivas N. Dharanipragada. The authors also thank Anne-Marie Anderson, John Graham, Jim Largay, Steve Liedtka, George Papadakis, Ajai Singh and Sam Weaver for providing comments, data, and helping them better understand the private debt placement process. They are grateful to Martin Walker (editor) and an anonymous referee for helpful suggestions. Seminar participants at the Lehigh University Business and Economics Workshop, the University at Buffalo, the Seventh Annual Australasian Finance and Banking Conference, and the 2008 Annual Meeting of the American Accounting Association also provided useful input.

* Address for correspondence: Uday Chandra, University at Albany - SUNY, Albany, NY 12222, USA. e-mail: uchandra@uamail.albany.edu

Abstract

Abstract:  Private placements of straight nonbank debt by publicly traded firms elicit a positive stock price reaction on average, consistent with a market perception that they confer significant certification and monitoring benefits on borrowers. However, long-run stock returns following the debt issues are significantly lower than benchmarks. Our results are consistent with the view that firms issue private debt prior to a decline in operating performance, and they disclose overly optimistic information in the pre-issue period which prevents information on the upcoming downturn from reaching the market in a timely manner. Lenders have private information on the post-issue performance decline prior to their lending decision, and take steps to protect their investment which do not benefit equity investors. Our results are inconsistent with certification and monitoring benefits accruing to equity investors from private nonbank debt.

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