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Why Do Public Firms Issue Private and Public Securities?

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  • Armando Gomes
  • Gordon Phillips

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.

Suggested Citation

  • Armando Gomes & Gordon Phillips, 2005. "Why Do Public Firms Issue Private and Public Securities?," NBER Working Papers 11294, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11294
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    Cited by:

    1. Saumitra, Bhaduri, 2012. "Why do firms issue equity? Some evidence from an emerging economy, India," MPRA Paper 38043, University Library of Munich, Germany.
    2. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, August.
    3. 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.
    4. Joshua D. Rauh & Amir Sufi, 2010. "Capital Structure and Debt Structure," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4242-4280, December.
    5. Ulrike Malmendier & Geoffrey Tate & Jonathan Yan, 2010. "Overconfidence and Early-life Experiences: The Impact of Managerial Traits on Corporate Financial Policies," NBER Working Papers 15659, National Bureau of Economic Research, Inc.
    6. Ulrich Hege & Stefano Lovo & Myron B. Slovin & Marie E. Sushka, 2009. "Equity and Cash in Intercorporate Asset Sales: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 681-714, February.
    7. Qian Wang, 2012. "The choice between publicly issued and privately placed preferred stocks," Managerial Finance, Emerald Group Publishing, vol. 38(7), pages 689-701, June.
    8. Ortiz-Molina, Hernan, 2007. "Executive compensation and capital structure: The effects of convertible debt and straight debt on CEO pay," Journal of Accounting and Economics, Elsevier, vol. 43(1), pages 69-93, March.
    9. Matteo Arena, 2011. "The corporate choice between public debt, bank loans, traditional private debt placements, and 144A debt issues," Review of Quantitative Finance and Accounting, Springer, vol. 36(3), pages 391-416, April.
    10. 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.
    11. Autore, Don M. & Kovacs, Tunde, 2010. "Equity issues and temporal variation in information asymmetry," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 12-23, January.
    12. Linda Allen & Aron Gottesman, 2006. "The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(1), pages 5-42, August.
    13. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    14. Carmen Cotei & Joseph Farhat, 2011. "An application of the two-stage Bivariate Probit–Tobit model to corporate financing decisions," Review of Quantitative Finance and Accounting, Springer, vol. 37(3), pages 363-380, October.
    15. Pinnuck, Matt & Shekhar, Chander, 2013. "The profit versus loss heuristic and firm financing decisions," Accounting, Organizations and Society, Elsevier, vol. 38(6), pages 420-439.
    16. Sudip Ghosh & Christine Harrington & Walter Smith, 2011. "Do windfall non-debt tax shields from acquisitions affect corporate debt issues?," Managerial Finance, Emerald Group Publishing, vol. 37(6), pages 537-552, May.
    17. Nini, Greg & Smith, David C. & Sufi, Amir, 2009. "Creditor control rights and firm investment policy," Journal of Financial Economics, Elsevier, vol. 92(3), pages 400-420, June.
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    More about this item

    JEL classification:

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

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