TAKEOVER EXPOSURE, AGENCY, AND THE CHOICE BETWEEN PRIVATE AND PUBLIC DEBT

Authors


  • We would like to thank the referee, David Denis; the editor, Jayant Kale; Paul Brockman; Espen Eckbo; Stephen Ferris; Brandon Julio; Mahendrarajah Nimalendran; Sarah Peck; Scott Richardson; Emre Unlu; Christopher Wikle; and seminar participants at University of Missouri, Marquette University, and the 2007 Financial Management Association annual meeting for helpful comments and suggestions.

Abstract

We examine how governance characteristics are related to the corporate choice between public and private debt. We find that firms with fewer takeover defenses and larger outside blockholder ownership are more likely to borrow from banks and to issue 144A debt. We also document that public debt cost is more sensitive to takeover exposure than bank debt cost. These results are consistent with the hypothesis that banks mitigate the expected negative effect of takeovers on debt value through covenants and debt renegotiations. Moreover, we show that firms with weaker internal monitoring are less likely to borrow from banks.

Ancillary