Three Empirical Essays on the Role of Information in the Public Debt Markets

This thesis consists of three related essays that examine the role of information in the market for corporate debt. The three essays collectively examine the role of information produced by the firm and its agents on alleviating information asymmetries facing public debtholders. In particular, the thesis examines the impact of bondholders? demand for reputation and information on the firm? s disclosure choices and accounting attributes; and the impact of information produced by monitoring the firm? s private debt before its entry to the public debt market on the yield spread of its initial bond. The first essay investigates the influence of public corporate debt on the willingness of UK firms to issue profit warnings. UK firms operate within a legal environment that is less litigious compared to their US counterparts. This setting allows for motives other than fear of litigation to affect UK companies? decision to warn. The results of this essay indicate that UK firms with public debt are more forthcoming with the disclosure of permanent negative news. Also, the results show that UK firms without public debt are more likely to hide bad news when they are closer to financial distress. However, for firms with public debt, the results indicate that the effect of closeness to financial distress on the willingness to warn is attenuated. These findings suggest that firms with public debt are deterred from hiding negative news for fear of damaging their reputation for truthful and timely disclosure. Public debt appears to act as a disciplinary mechanism on corporate disclosure policy.The second essay examines the impact of the initial public debt offering (IPDO) on the timeliness properties of the firm? s accounting income. Firms are more likely to communicate with private lenders on a private, insider-basis, while they are more likely to communicate with bondholders using public information. Therefore, bondholders, compared to private lenders, are expected to be more sensitive to the quality of public information. The results indicate that firms adopt a timelier policy of economic loss recognition after their initial public debt offering using Basu? s (1997) time series measure of timely loss recognition. These findings suggest that firms face higher demand for public information from a large number of external and dispersed bondholders.The third essay investigates the impact of information associated with prior private debt financing on the yield spread of companies? initial public debt offerings. Specifically, this essay focuses on information produced through monitoring by credit rating agencies and monitoring by banks. The findings indicate that IPDOs with the same or upgraded credit ratings enjoy significantly lower yield spreads. This finding suggests that changes in credit ratings could convey new information to investors regarding the firm? s commitment to maintain a high credit quality. In addition, the findings of this essay indicate that strong banking relationships significantly reduce yield spreads for initial public debt offerings. This suggests that a strong banking relationship conveys a positive signal to bondholders regarding the bank? s assessment of the quality of the firm.