DCC - Séminaire de recherche - Philip Joos - University of Tilburg, NL
The Pricing of Private and Public Placement Bonds
Thursday 14 February 2019 (13h30 - 15h00) - Anthropole - 5021
Using a sample of private and public placement bonds issued by European firms in the period 2002-2015, we find that the spread on private placements is on average more than 100 basis points higher than for public placements. It is mainly credit risk and the use of covenants, proxying for agency costs, that drive this difference and that also explain the variation in both private and public placement bond spreads (60%). The effect of covenant use on the spread is as important as credit risk. The use of investment covenants resolves agency conflicts, resulting in lower spreads. Adding financing covenants, however, may lead to suboptimal decisions, resulting in higher spreads.