Private premium in public bonds.

• Main Authors: Lim, Jun Qi., Lee, Wan Lin., Kwok, Rena Su Ling.
• Other Authors: Nanyang Business School
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Business
• Online Access: http://hdl.handle.net/10356/51330
• Institution: Nanyang Technological University

Our paper aims to investigate and gain insights of the presence of private premium in firms. We first determine whether holding a private status leads to more illiquidity. Thereafter, we compare the private premium differences between US and Non-US firms. We further explore whether high yield bonds or investment grade bonds are the drivers behind the presence of private premium in firms. An additional investigation of the private premium difference between developed and non-developed markets is carried out. We use information on a complete sample of 77,054 private firms companies from 2002 to 2010, which we have collected firm-specific information and matched bond information obtained with Capital IQ. We also use data on monthly bond yield spreads, which comes from Bank of America-Merrill Lynch Corporate Master Index Compositions. We determine that bearing a private status will increase the illiquidity of bonds issued by the US firms, even after controlling for crisis dummy variable. We document that there is a presence of private premium in Non-US firms, and conclude that private premium in Non-US firms is consistently lower than that of US firms. We address this finding through analysing the inclusion of Investment Grade variable, and conclude that the difference in private premium is largely due to the differing market power of credit rating agencies in US and Non-US countries. Lastly, we note that the private premium incurred by the firms from the non-developed countries is very much higher than that of the firms from the developed countries.