Article
Private versus Public Debt Placement: Does Financial Disclosure Level Affect Debt Placement?
Journal of Accounting & Finance Research
(2004)
Abstract
Researchers and practitioners have devoted considerable attention to firms' policies regarding discretionary disclosures. Prior studies argue that firms increase demand for their debt and equity issues and, thus, lower their cost of capital by providing more informative disclosures. However, empirical research has generally been unable to document significant benefits from increased disclosure. Studies examining disclosure level have not distinguished between public and private debt issuances. Thus, the effect that financial disclosure quality has on a firm's placement of debt has not been considered. We argue that a company that provides lower levels of voluntary financial disclosure is less likely to issue debt by public sale and, consequently, more likely to place debt privately. Because yields on private debt generally exceed those of publicly-issued debt, our study provides indirect evidence that the level of firms' disclosures is negatively related to the cost of debt capital. Our results indicate a positive relation between the level of firms' disclosures and their proportionate levels of public debt. This finding suggests that less informative disclosures reduce the firm's ability to sell debt securities in the capital markets. Firms that provide less informative disclosures must resort to more costly sources of debt financing, such as bank debt and private placements. Accordingly, our findings provide support for the notion that less informative disclosures are associated with a higher cost of capital.Â
Keywords
- Financial disclosure,
- Disclosure,
- Capital costs,
- Debt,
- Capital market
Disciplines
Publication Date
Fall 2004
Citation Information
David S. Gelb and Joyce Strawser. "Private versus Public Debt Placement: Does Financial Disclosure Level Affect Debt Placement?" Journal of Accounting & Finance Research Vol. 12 Iss. 5 (2004) p. 139 - 152 ISSN: 1093-5770 Available at: http://works.bepress.com/joyce-strawser/4/