THE DEMAND FOR FUNDS IN THE PUBLIC AND PRIVATE CORPORATE BOND MARKETS.

The purpose of this paper is to determine whether corporations' decisions to borrow in the public or private corporate bond markets are significantly influenced by yield differentials between the two markets and whether the sensitivity of corporations to yield differentials increases with the relative ease with which they can borrow in either market. In recent years, the influence of interest rates on corporation financing decisions has received considerable attention in studies which have sought to identify the determinants of corporate external financing and the maturity composition of corporations' liabilities. In none of these studies, however, can the signs of the interest rate variables in the regression equations be predicted. This is because the expectations hypothesis of the term structure of interest rates, which these studies accept, posits that interest costs will be equalized regardless of the maturity financing strategy a borrower adopts. As a result the credibility of the findings of these studies concerning the influence of interest rates on financing decisions must be questioned even when this influence was found to be significant.