Determinants of Corporate Debt Specialization: Insights from Private Firms

This study provides the first evidence on private firms’ debt specialization. Contrary to existing evidence that firms with higher expected bankruptcy costs, constrained access to capital, and higher information asymmetry specialize in their debt borrowing, we find that private firms adopt more diversified debt portfolios than public firms. We show that private firms’ debt diversification is mainly driven by the need to mitigate lender holdup costs arising from high information asymmetry. We also find that the concentration of equity ownership is negatively related to debt specialization, suggesting private firms have less motivation to use specialized debt as a governance mechanism. Our findings highlight the roles of financial flexibility and reduced monitoring in shaping private firms’ debt structure decisions.