The authors examine a firm's choice between public and private debt in a model where the firm's financing source affects its product market behavior. Two effects are examined. When frims' risk-taking decisions are strategic substitutes, debt financing leads to excessively risky product market...

We explore a firm's choice between public and private debt in a model where the firm's financing source affects its product market behavior. Debt can promote excessively risky product market strategies, but lender control through restrictive covenants - a characteristic of private debt - can...