Streetwise Professor

May 16, 2012

Connect These Dots

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:11 am

An interesting contrast in a couple of disparate articles I came across in my morning news trawl.

Item One: Sechin opposes privatization of Transneft because “public trading of shares would complicate the firm’s debt financing.”

Item Two: NY Fed research paper shows that firms with publicly traded equity can borrow at lower rates than otherwise comparable private firms:

In a 2012 New York Fed study, Chenyang Wei and [Anna Kovner] find that interest rate spreads on publicly traded bonds issued by companies with privately traded equity are about 31 basis points higher on average than spreads on bonds issued by companies with publicly traded equity, even after controlling for risk and other factors. These differences are economically and statistically significant and they persist in the secondary market. We control for many factors associated with bond pricing, including risk, liquidity, and covenants. Although these controls account for some of the absolute pricing difference, the price wedge between public and private companies remains. Despite these pricing differences, private companies with public bonds are no more likely to go bankrupt or to be downgraded than are similar public companies.

One plausible explanation of the Kovner-Wei result is that private firms can more readily divert cash flows and/or are more difficult to monitor than public ones.

And monitoring the diversion of cash flows is almost certainly the “complication” that Sechin wants to avoid.  The NY Fed paper’s results suggest that Transneft would be able to borrow more cheaply if it also floated common equity.  But doing so would reduce the private control benefits that Sechin and his ilk reap from Transneft.  In the end, not surprisingly, the private control benefits win out.

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  1. Remember, sunlight is the best disinfectant, or at least shows where the dog poops is on the sidewalk.

    Comment by sotos — May 17, 2012 @ 6:38 am

  2. are – its early

    Comment by sotos — May 17, 2012 @ 6:42 am

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