Information asymmetry, monitoring, and the placement structure of corporate debt

We empirically examine the impact of flotation costs, agency conflicts, regulation, and information asymmetries on a firm's mix between public and private debt. Results indicate that firms with larger issue sizes exploit the scale economies in flotation costs of public debt. Firms with higher contracting costs due to moral hazard have higher proportions of private debt. There is only limited support for the adverse selection hypothesis. We find little evidence that firms with favorable private information about future profitability choose more private debt. However, those firms with favorable information about future profitability that also operate under greater information asymmetry rely more on private debt.