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Rev Fin 2000; 13:1017-1055
© 2000 the Society for Financial Studies

Article

The private placement of debt and outside equity as an information revelation mechanism

MA Habib1,z and D Bruce Johnsen2
1 London Business School, Sussex Place, Regent's Park, London NW1 4SA, UK
2 George Mason University School of Law
z Corresponding author
E-mail: mhabib@lbs.ac.uk

Abstract

We view debt and outside equity as serving to elicit credible information from different specialists about the value of an enterprise in its various uses. The equity valuation specialist provides a price forecast for equity that reveals information about the value of the enterprise in its primary use. The debt valuation specialist provides a price forecast for debt that reveals information about the value of the enterprise in its alternative use. The prices forecast by the valuation specialists credibly reveal their private information because they are required to buy the associated claims at the forecast prices, thereby bonding their valuations.


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