Private Ownership and the Cost of Debt: Evidence from the Bond Market

Using a sample of public bonds issued by privately-owned and publicly-owned companies we find that, after controlling for financial fundamentals, bond characteristics, and information environment effects, the cost of public debt issued by privately-owned companies as captured by ratings and yield spreads is significantly higher than that issued by publicly-owned companies. This higher cost is justified, but only in part, by higher than expected actual rates of default among privately-owned firms. Among privately-owned companies, the cost of debt is higher for companies controlled by private equity (PE) firms. However, ownership by large PE firms reduces the cost of debt to their investees as compared to those owned by smaller PE firms. The results contribute to our understanding of the costs of public versus private ownership and our knowledge on the role of ownership type and "soft" information in bond valuation.