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

Corporate bond issuance has followed an upward trend in the last decade that has tripled the volume of corporate public debt. There is a long literature on reasons why firms choose this option, which has recently explored the influence of a firm’s reputation on the decision to go public. The measures that have been used to determine reputation include a firm’s size, creditworthiness, and past financial history outside the bond market. Our paper offers a theoretical extension of the Holmstrom and Tirole (1997) framework that allows us to ask what difference a good reputation in the bond market has on the probability that a firm will issue. In contrast to other studies, we isolate firms with a distinctly good reputation based on high and sustained implied bond ratings to empirically evaluate the effect on bond issuance. Our results from a panel of 983 US firms from 1995-2004 show that firms with ‘good reputation’ are up to 50 per cent more likely to issue bond than other firms even after controlling for other influences.