How Does Reputation Influence a Firm's Decision to Issue Corporate Bonds? New Evidence from Initial and Seasoned Public Debt Offerings

Abstract

Why does a firm make the financially significant decision to issue bonds and what influences that decision? We find ex-ante characteristics determining creditworthiness and incentives to raise external finance are influential, but direct bond market reputation is more important: for a given set of characteristics a firm is more likely to issue if it has done so previously. We offer a new analysis that complements existing studies of private versus public bond issues, the scale and timing of IPOs and the effect of reputation on the financing of the firm. Our paper offers a theoretical extension of the Holmstrom and Tirole (1997) framework and an empirical assessment using a panel of 983 US firms from 1995-2004 to show firms with greater reputation and signals of creditworthiness and incentives to raise external finance access bond markets with higher probability than other firms.

Keywords: Bond financing, Reputation, Financial factors

JEL Classification: E44, G32