Capital Structure Decisions in Private and Public Firms

Abstract

In this paper, I examine public and private firms’ leverage choices using the Capital IQ database. I find that private firms’ leverage is about 3.8 higher than that of public firms. I also find that asset tangibility has a much larger impact on the leverage decisions of private firms than it does on those of public firms. Moreover, during the recent financial crisis, private firms increased both their leverage and their net leverage compared to public firms. These changes in private firms’ leverage are explained by a 21.3 percentage points decrease in their net debt issuance and a 42.6 percentage points decrease in their net stock issuance compared to public firms. Overall, the evidence suggests that due to informational asymmetries between firm corporate insiders and lenders, asset tangibility is the key determinant of private firms’ ability to access debt markets, especially during bad times.