• The Korean Journal of Financial Management
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• v.21 no.2
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• pp.99-123
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• 2004

We focus in this study on incremental financing decisions and estimate a logit model for the probability a firm will choose a private placement over a public bond issue. We hypothesize that information asymmetry, financial risk, agent cost, and proprietary information may affect a firm's choice between public debt and private placements. We find that as the size of firm increases, the probability of choosing a private placement declines significantly. The age of the firm, however, is not a significant factor affecting the firm's choice between public and privately-placed bond. The coefficients on the firm's leverage and non-investment grade dummy are significantly positive, meaning firms with high financial risk and credit risk select private placements. The findings regarding agency-related variables, PER and Tobin's Q, are somewhat complex. We find significant evidence that firms with high PER prefer private placements to public bonds, suggesting that borrowers with options to engage in asset substitution or underinvestment are more likely to choose private placements. The coefficient of Tobin's Q is negative, but not significant, which weakly support the hold-up hypothesis. When we construct an interaction term on the Tobin's Q with a non-investment rating dummy, however, the Tobin's Q interaction term becomes positive and significant. Thus, high Tobin's Q firms with a speculative rating are significantly more likely to choose a private placement, regardless of the potential hold-up problems. The ratio of R&D to sales, proxy for proprietary information, is positively significant. This result can be interpreted as evidence in favor of a role for proprietary information in the debt sourcing decision process for these firms.

• The Korean Journal of Financial Management
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• v.20 no.2
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• pp.1-39
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• 2003

Using a comprehensive sample of convertible security offerings by Korean firms from 1981 to 1999, we examine the effect of convertible bond issues on firm value. We find that the announcement of convertible bond issues has a positive effect on firm value. However, the announcement of private convertible bond issues by chaebol firms has a significant negative effect on their market values. This result is different from that in Japan, suggesting that the efficiency of the financing decision by Korean chaebol is different from that by Japanese keiretsu. In addition, we find that the announcement effect of private convertible bond issues by chaebol firms has a significant relation with the corporate governance variables such as ownership structure, bank relationship. These results indicate that convertible bond issues can be used as a mechanism for chaebol owner-manager to give rise agency problems at the expense of the wealth of minority shareholders.