Date of Award
Doctor of Philosophy
David S. Kidwell
Ronald E. Shrieves, F. Y. Lee, Ronnie J. Clayton, John L. Trimble
This dissertation examines the issue cost of public utility debt sold publicly and privately from June 1979 to December 1983 and determines: (1) whether private and public debt have the same issue cost for firms who substitute between private placements and public sales (switch hitters), ceteris paribus; (2) whether issue cost differences between public issues and private placements by switch hitters vary with the degree of market uncertainty; (3) whether firms who do not substitute between private placements and public sales (non-switch hitters) choose to issue debt privately because the agency costs of debt can be resolved less expensively in the private market than in the public market; and (4) whether the benefits which non-switch hitters obtain from issuing privately increase as agency costs of debt increase.
The dissertation’s findings suggest that for switch hitters, there is no cost difference on average between public issues and private placements sold during our test period. This finding suggests that switch hitters view the two methods of sale as close substitutes. However, when credit market conditions are uncertain the results are much different. During periods of volatile interest rates such as 1980-1981, switch hitters can save an average of 49 basis points by issuing debt privately rather than publicly. This cost saving was not evident during more stable periods such as 1979 III and 1983.
The results of the tests on non-switch hitters support an economic rationale for the existence of the private placement market. The tests indicate that below investment grade issues by non-switch hitters would have had substantially higher issue costs had they been sold publicly. Further, the findings show that the cost advantage of private placements over public issues increases as agency costs of debt increase. For investment grade non-switch, the tests indicate no cost difference between private placements and public issues; presumably, these firms could have issued publicly without incurring additional issue costs. However, these firms sell their debt privately because their issues are too small to enjoy a successful public sale.
Blackwell, David William, "The Firm's Decision to Issue Debt Privately: Motivations and Costs. " PhD diss., University of Tennessee, 1986.