Financial Contracting and the Choice between Private Placement and Publicly Offered Bonds


  • We thank Teachers Insurance and Annuity Association for providing the data on private placement bonds, Merrill Lynch & Co. and Jerome Fons of Moody's Investor Services for providing the data on publicly offered bonds. Helpful comments from the editor (Deborah Lucas), two referees, Mark Carey, Mark Flannery, Chris James, Jose Lopez, and participants at the Federal Reserve System Conference and the AFA Annual Meeting are gratefully acknowledged. We also thank Judith Goff and Anita Todd for editorial suggestions. All remaining errors are ours. The views expressed in this paper represent the authors’ views only and do not necessarily represent the views of the Federal Reserve Bank of San Francisco or the Federal Reserve System.


The financial contracting in private placement bonds and publicly offered bonds are different. Our data show that private placement bonds are more likely to have restrictive covenants than public bonds. Private placement bonds are also more likely to be issued by smaller and riskier firms. For investment-grade firms that issue bonds in both markets, our analysis shows that firms select the bond type to minimize financing costs. We find significant differences in the pricing of private placement and publicly offered bonds, and some of these differences appear to be related to the different institutional features between the two markets.