Does the Change in the Information Environment Affect the Choice between Bank Debt and Public Debt?

Using brokerage mergers and closures as natural experiments, we examine how exogenous changes in the information environment affect a firm's choice between bank debt and public debt. Our difference-in-differences approach shows that exogenous increases in information asymmetry lead firms to substitute away from public debt towards bank debt, which is consistent with predictions in the theoretical literature that public bondholders are more sensitive than banks to information asymmetry problems. We also demonstrate that the effect of the change in the information environment on a firm's debt choice is more pronounced for firms with low initial analyst coverage, for firms losing star analysts, and for firms with high asset substitution risk. Importantly, this paper directly tests the underlying assumption behind the theoretical framework by documenting an instantaneous negative bond market reaction, an insignificant change in bank loan spread, a reduced bond issuance and an increased bank loan issuance for firms with analyst loss