The private placement of debt and outside equity as an information revelation mechanism

We view debt and outside equity as serving to elicit credibleinformation from different specialists about the value of anenterprise in its various uses. The equity valuation specialistprovides a price forecast for equity that reveals informationabout the value of the enterprise in its primary use. The debtvaluation specialist provides a price forecast for debt thatreveals information about the value of the enterprise in itsalternative use. The prices forecast by the valuation specialistscredibly reveal their private information because they are requiredto buy the associated claims at the forecast prices, therebybonding their valuations.