Sharon P. Katz
Associate Professor of Accounting and Control
Public Firms; Private Firms; Cost of Debt; Bond Valuation; Credit Rating;
A number of studies have examined the effect of public and private ownership on the cost of debt and concluded that the cost of debt of privately owned firms is higher driven mainly by the poorer information environment in which these firms operate. The authors extend this strand of research in two ways.First, they identify and empirically establish the mechanisms that bring about a higher cost of debt to privately owned firms - namely, the limited access that these firms have to the equity capital market, their high rate of management and private-equity ownership, and their less conservative reporting.Second, the authors improve the reliability of the estimates of the effect of ownership type on the cost of debt by controlling for the different information environments in which privately and publicly owned firms operate. This is accomplished through the use of a sample consisting of publicly owned and privately owned firms that have public debt and are therefore subject to identical reporting and disclosure requirements.Certain data and design features allow the authors to better control for other factors that might lead to the observed difference in the cost of debt between the two groups of firms. The results contribute to the authors’ understanding of the role of ownership type on the cost of capital.