The Costs of Being Private: Evidence from the Loan Market

In this paper, we seek to evaluate the relative costs of debt for private versus comparable publicly traded rms. US studies of this important question have been limited due to the absence of comprehensive nancial data on privately-held rms. However, such data is available in the UK. Consequently, we employ a unique dataset of loans taken out by both types of UK rms with a large array of loan and borrower characteristics. We use propensity scores to match private and public companies and nd that private rms pay, on average, 29 to 42bps higher loan spreads than comparable public rms. These ndings are shown to be highly robust across size, opaqueness, relationships, rm age, ownership structure and, importantly, alternative tests that control for endogeneity (ex-post performance, instrumental variable tests and treatment effects models). Consequently, it appears that being private results in debt costs that are signi cantly higher for private rms than public rms and may mitigate some the previously identi ed bene ts of going private. JEL-Classi cation: G21, G22