Have you ever wondered why some firms issue convertible debt privately whereas other firms choose to issue their debt publicly? Well wonder no more! Devrim Yaman has answered at least the majority of our questions in her Bquest article. Information story explains public vs private choice
and the answer? Where information asymmetry problems are great, firms choose private placements. Which is what I think we would have suspected, but now we also have some empirical evidence.
The main finding:
"Our sample consists of 78 private and 229 public placements of convertible bonds issued by industrial firms between 1983 and 2002. The results show that the primary determinant of the placement choice for convertible debt is a firmÂs information asymmetry problems. We find that firms with higher levels of information asymmetry are more likely to choose private placements. This result is consistent with the argument that investors in private placements establish closer relations with the issuing firm and can, therefore, value the firm more accurately. This result also indicates that the commitment of better informed investors in private placements signal favorable information to the market."
Link to paper.