The choice between public and private debt: A survey

We survey the major theoretical and empirical findings of the research on the firm’s choice between public and private debt, and on the subsequent decision between bank and non-bank private debt. First, we review information-based theories, where banks are information producers, keep the firm’s private information confidential, or monitor the firm’s actions after the loan. We then review models where banks’ advantage over public lenders is in their superior ability to liquidate the firm or renegotiate loan contract terms in the event of financial distress. Finally, we review the evidence on firms’ use of different types of private debt.