Quality of Private Information and the Cost of Debt

The microstructure of the bond market suggests that private information could play a different role in the bond market than in the equity market. In particular, higher quality of private information can reduce the dealer power and estimation risk while having limited effect of increasing information asymmetry among mostly institutional investors. We show that while higher precision of public information is associated with lower cost of debt, higher precision of private information is also associated with lower cost of debt. This is in contrast to the previous finding from the equity market that higher precision of private information is associated with higher cost of equity. In addition, we find a substitution effect between the two sources of information. Our results suggest that, when assessing their reporting strategy, managers should not only consider the relation between public and private information, but also weigh the relative importance of the cost of debt and the cost of equity.