Takeover Exposure, Agency, and the Choice between Private and Public Debt

This study examines how governance characteristics are related to the corporate choice between public debt and different forms of private debt. We find that firms with fewer takeover defenses and larger outside blockholder ownership are more likely to issue private debt. We also document that the cost of public debt is more sensitive to the degree of takeover exposure than the cost of bank debt. These results are consistent with the hypothesis that banks mitigate the expected negative impact of takeovers on debtholder value by enforcing restrictive covenants and by renegotiating the debt contract in case of a change in control of the borrowing firm. The results of this study are also consistent with the conjecture that firms more exposed to takeovers are more likely to issue speculative-grade debt in the 144A market than to rely on public debt. Moreover, we show that firms characterized by weaker internal monitoring are less likely to borrow from banks, consistent with the view that managers of firms with greater agency problems avoid bank monitoring to maintain perquisite consumption