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Why Do Public Firms Issue Private and Public Securities?

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Author Info
Armando Gomes
Gordon Phillips

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Abstract

We examine a comprehensive set of private and public security issuance decisions by publicly traded companies. We study private and public issues of debt, convertibles and common equity securities - a total of 6 different security-market choices. The market for public firms issuing private securities is large. Of the over 13,000 issues we examine, more than half are in the private market. We find that asymmetric information and moral hazard problems play a large role in the public versus private market choice and the security type choice. Our findings show that asymmetric information impacts security choice in a particular pattern: Conditional on issuing in the public market we find a pecking order of security issuance holds, firms with higher measures of asymmetric information are less likely to issue equity. We find a reversal of this pecking order in the private market, firms with higher measures of asymmetric information are more likely to issue equity and convertibles. Second, we find risk and investment opportunities are important in determining which security type a firm issues. Firms with high risk, low profitability and good investment opportunities are more likely to choose equity and convertibles and to issue privately. The results support models of security issuance where private securities give investors more incentives to produce information and monitor the firm.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11294.

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Date of creation: May 2005
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Handle: RePEc:nbr:nberwo:11294

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G0 - Financial Economics - - General
G2 - Financial Economics - - Financial Institutions and Services
G3 - Financial Economics - - Corporate Finance and Governance

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cécile Carpentier & Jean-François L'Her & Stephan Smith & Jean-Marc Suret, 2007. "Risk, Timing and Overoptimism in Private Placements and Public Offerings," CIRANO Working Papers 2007s-27, CIRANO. [Downloadable!]
  2. David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2004. "PIPE Dreams? The Performance of Companies Issuing Equity Privately," NBER Working Papers 11011, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Hege, Ulrich & Lovo, Stefano & Slovin, Myron & Sushka, Marie, 2006. "Equity and cash in intercorporate asset sales : theory and evidence," Les Cahiers de Recherche 859, HEC Paris. [Downloadable!]
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