Showing papers on "Debt published in 1976"

Barro on the Ricardian Equivalence Theorem

Abstract: Is public debt issue equivalent to taxation? This is an age-old question in public finance theory. David Ricardo presented the case for the affirmative.1 Professor Robert J. Barro reexamines the question in his recent paper (1974) without, however, making reference to Ricardo or other early contributors. Although his discussion is carefully qualified to allow for exceptions under specified conditions, the thrust of Barro's argument supports the Ricardian theorem to the effect that taxation and public debt issue exert basically equivalent effects. Barro's central emphasis is on demonstrating that, under reasonable conditions which involve overlapping generations of persons with finite lives, taxpayers will capitalize the future obligations that public debt issue embodies. To the extent that this capitalization occurs, government bonds do not add to the perceived net wealth in the economy. From this Barro infers that the substitution of debt for tax finance will exert no expansionary effect on total spending. There are two questions here. Are the future tax liabilities fully capitalized? And, even if they are, does this necessarily imply that the fiscal policy shift exerts no effect on total spending? To establish the second result, it is necessary to examine the differential impacts of taxation and debt issue, quite apart from the question of the capitalization of future taxes. Barro wholly neglects this necessary part of any comparative analysis of the two fiscal instruments, and, because of this neglect, his conclusion is not nearly so relevant for policy as it seems to be. This neglect may stem from Barro's failure to specify properly the inclusive set of transactions that debt issue represents.

The Intertemporal Behavior of Corporate Debt Policy

Abstract: This study provides, as a result of comprehensive search, a better description of the intertemporal behaviors of corporate debt policy, comparable to those that exist for dividend policy. Although leverage policy may vary a great deal from firm to firm, we found that: (1) The rather simple partial adjustment model with constant payout ratio to have the best predictive performance and other superior models include the first-order markov process and the historical average leverage ratio; (2) in general, firms seem to operate with a concept of “target leverage ratio,” e.g., target ratio computed from the partial adjustment models, or from historical or industry averages; (3) there is some weak evidence of the presence of unused debt capacity for the total sample; (4) the average speed of adjustment to close the gap between the desired and actual leverage ratio is a respectable 67 percent in the first year (due to the lumpiness of debt issue, individual firms tend to be either under or overadjusted); (5) there are some indications that firms also adjust debt behavior to anticipated future increases or decreases in assets. There are several areas for future research, for instance, the best debt model could serve as the first stage of a possible two-stage equation in the empirical verification of the MSM's assumption of the independence of the investment decision to the financing decision (e.g., [7]), on a further exploration of how firms' expectations affect debt behavior. Finally, the existence of a rational target leverage ratio should encourage research interest concerning the existence of an empirically testable optimal leverage ratio.

Optimal initiation of bankruptcy proceedings by debt holders

Abstract: WHILE THE IMPACT of bankruptcy costs on the value of the firm has been examined in several ways,1 no one has examined it from the standpoint of debt holders.2 In this paper, a state-preference model is employed to determine whether or not bankruptcy proceedings should be initiated by creditors and the optimal timing of such proceedings. Both single-period and multi-period situations are considered. We begin by assuming that bankruptcy may be forced whenever the firm involved is unable to meet its principal or interest obligations. We then consider other conditions, (protective covenants), under which default can be triggered. By concentrating on the valuation of debt instruments in a market context, new insights are possible in an area which heretofore has lacked systematic and rigorous decision rules.

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract: This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.

A World divided : the less developed countries in the international economy

Abstract: List of contributors Preface 1. Introduction Gerald K. Helleiner Part I. Issues in International Trading Policy: 2. A new international strategy for primary commodities Alfred Maizels 3. The potential for monopolistic commodity pricing by developing countries Marian Radetzski 4. The dynamics of the new poor power Paul Streeten 5. The direction of international trade: gains and losses for the Third World Frances Stewart Part II. Relations with Transnational Enterprises: 6. Power, knowledge and development policy: relations between transnational enterprises and developing countries Constantine V. Vaitsos 7. 'Ownership and control': multinational firms in less developed countries Edith Penrose Part III. Issues in International Finance and Monetary Policy: 8. The post 1971 international financial system and the less developed countries Carlos F. Diaz-Alejandro 9. Debts, development and default Goeran Ohlin 10. The external debt problem of the developing countries with special reference to the least developed Nurul Islam Part IV. Planning for a World in Disorder: 11. Aspects of the world monetary and resource transfer system in 1974: a view from the extreme periphery Reginald H. Green 12. International agencies: the case for proliferation John White Index.

Competitive versus Negotiated Underwriting of Public Utility Debt

Abstract: The question as to whether competitive bidding or negotiated underwriting is the least-cost method for distributing new issues of public utility bonds remains largely unresolved This study analyzes the costs on such new issues during the period from January, 1972, through August, 1974 The results indicate that, in general, competitive bidding was the least-cost method of distributing public utility obligations during this period An analysis of the relationship between issue size, underwriting arrangement (ie, competitive versus negotiated), and underwriters' charges does, however, suggest that negotiated underwriting may be the preferable alternative in certain circumstances

Rural Money Markets in India.

Abstract: In this thesis I seek to analyse some major characteristics of the Indian rural money market between the early 1950's and late 1960's. The Indian rural money market is distinguished by its duality, with the unorganized sector largely dominating the supply of funds even to-day. On the demand side, the pattern of debt and borrrowing has remained roughly the same during the period studied. Capital expenditure rather than family expenditure seemed to be the more significant variable affecting credit demand. This is reflected in the correlation found between higher levels of debt/borrowing and larger capital expenditure. The most important form of security against which loans were either borrowed or outstanding was personal. Seasonality was observed in debt and borrowing. The modal range of rural interest rates in India was found to be between 18 and 25 per cent, (which is considerably less than many commentators have implied). Rural interest rates are largely explained by risk and uncertainty rather than by the monopoly power of money-lenders, though monopoly profit may have existed in some cases. Statistical tests showed positive correlation between income of farmers and re-payments and negative correlation between the interest rate, on the one hand, and income, repayments and monetization on the other. A rise in farm income, thus, may reduce the risk-premium and, therefore, rural rates. In the organized sector, the primary credit co-operative societies mostly fail to satisfy the various criteria of financial viability, though in some states their progress was not unsatisfactory. The major defects in their working were poor quality of loan administration leading to rising overdues, bad management and failure to mobilise rural savings and link credit to marketing. The total size of the two sectors of the rural money market and the links between them were difficult to measure in the absence of reliable data. Rough estimates tentatively suggested a slow fall in the size of the unorganized market and tenuous but perhaps slowly growing links between the sectors. For example, bazaar rates were found to be influenced by lagged Bank Rate. The existing policies for developing these links are criticised and some methods are suggested for further integration. These include the development of co-operative paper, improving the quality of hundis, and the development of a multi-agency approach which would foster productive use of loans. Successful prosecution of these policies would lend to a rise in farm incomes. It may be suggested that this will reduce the rural interest rate.

A Model for Corporate Debt Maturity Decisions

Abstract: Whenever the firm must borrow funds, it must also decide maturity of the new debt. Yet, the decision models which have dealt with the debt maturity decision have done so almost incidentally, as an extension of the decision to exercise the call provision on outstanding bonds ([6], [10], [23]). There has been little direct examination of the corporate debt maturity decision. In an attempt to fill this gap, this paper is an exploration of the debt maturity decision for a firm which is concerned with minimizing the present value of the expected costs of borrowing. This paper develops a discrete dynamic programming model of the debt maturity decision, in a world where interest rates follow a finite Markov process, and where the yield curve is formed from expectations regarding the future course of interest rates. With this optimization model, the influence on the debt maturity strategy of variables such as flotation costs and liquidity premiums will be explored. There will be no consideration of the risks associated with alternative borrowing strategies.

An empirical study of mortgage payment to income ratios in a variable rate mortgage program

Abstract: MANY LEGISLATORS and consumer protection groups have been concerned with the fate of the mortgagor under a variable rate mortgage when interest rates rise The major concern is whether the mortgage payments become excessive under a variable rate program in which the payment varies This study addresses this question by examining the experience of the Federal Land Banks with their variable rate rural home mortgage program The Federal Land Banks constitute a large part of a financial complex called the Farm Credit System The Farm Credit System is composed of a regulatory agency (The Farm Credit Administration or FCA) and three sets of agricultural banks: The Federal Land Banks (FLBs), the Federal Intermediate Credit Banks (FICBs), and the Banks for Cooperatives (BCs) The FLBs extend long term loans through local Federal Land Bank Associations (FLBAs) for agricultural purposes and to finance rural homes The FICBs extend short and intermediate term credit through locally owned and managed Production Credit Association (PCAs) for agricultural purposes and, to a minor degree, for rural home financing The BCs extend both short and long term credit to agricultural cooperatives The FLBAs, PCAs and BCs are owned by the borrowers who purchase equity in proportion to the amount of funds borrowed The FLBAs and PCAs own stock in the FLBs and FICBs, respectively The BCs are directly owned by their cooperative borrowers Borrower control is exercised through a system of local boards of directors There are no federal funds invested in the banks The Farm Credit Banks are unique in several ways For example, the FLBs can, with FCA approval, change the interest rate on an outstanding mortgage as often as and to the degree considered necessary by their boards of directors1 A rate change results in a change in the size of the mortgage payment rather than in the maturity2 The rates charged are not directly linked to any index The banks attempt to generate revenues sufficient to cover operating expenses, debt costs, losses, and to provide for the accumulation of sufficient equity to serve as a base for future borrowings Excess earnings can be repaid to the borrowers in the form

Some More Problems with Income-contingent Loans: The Case of Medical Education

Abstract: In a recent article in this Journal, Nerlove (1975) notes that incomecontingent loans for financing higher education may affect the borrower's income profile. This is true both ex ante and ex post: ex ante, because "adverse selection" loads the plan with poor insurance risks; ex post, because the "moral hazard" of repayments alters the borrower's choice between income and leisure. Nerlove regrets that "unfortunately there is very little empirical evidence on these profiles and effects." In this comment I will present evidence on the moral hazard created by incomecontingent loans for financing medical education.' Awareness that medicine is a secure and remunerative career, coupled with rising costs and tight public budgets, has fostered proposals for placing more of the burden on the student.2 It is argued that the obligation should be financed by income-contingent loans because of moral hazard. By taking income3 the plan changes the earnings profiles of alternative medical specialties to favor the low-income primary care fields. Challoner (1974) considers this a positive feature of the plan: "As a result of the pooled risk or insurance principle, no borrower would have to worry about a large debt that he could not repay. Thus, his decision for a higher or lower paying professional activity need not be colored by the specter of a large conventional debt, soon to be repaid. This scheme could have important effects on specialty distribution." Since federal policy encourages training more primary care physicians (Kennedy 1974), income-

The evaluation of the lease versus purchase alternatives

Abstract: A survey of the literature in financial management reveals persistent disagreement regarding the appropriate method for the evaluation of the lease versus purchase alternatives. Most of the recent controversy centers around the appropriate method of incorporating into the evaluation the effects of the implicit debt financing embodied in a lease contract [1, 2, 3]. A lease represents simultaneously an investment and a financing decision, and a leased asset generates both operating cash flows and financial cash flows. As such, it has an impact on the firm's financial structure and financial risk different from that generated by a regular asset acquisition that should be quantified and incorporated into the evaluation. This paper provides an analytical framework for the lease versus purchase evaluation that resolves this issue by neutralizing explicitly the impact of the lease contract on the firm's financial structure and debt capacity. Other approaches to lease evaluation are discussed and compared to the evaluation model proposed here.

The Conversion Loan of 1958: A Simulation Study of Its Macroeconomic Consequences

Abstract: The Conversion Loan of 1958: a simulation study of its macroeconomic consequences. Simulating with the RDx2 model of the Canadian economy, we establish the time pattern of the macroeconomic impacts of the 1958 Conversion Loan which doubled the average term to maturity of the federal debt. We find a maximum flow impact in 1960 of -1.6 per cent of real GNE, moderated by the accompanying price support programme to -1 per cent. The contractionary forces come from the decline in investment occasioned by the rise in the long rate. We find little impact through an appreciating exchange rate. We evaluate the prospects for a policy such as Operation Twist and find them quantitatively significant.

The Analysis of Working-Capital Positions by Outsiders

Abstract: The component items of, and the overall position of, working capital is analysed by outside parties for credit extension, lending and investment purposes. Interested parties include: (1) Trade and expense creditors who give short-term credit to the firm. They only give credit as long as they think the firm will settle the debt on the due date. (2) Overdrafts and loans by banking and financial institutions. The granting of these facilities, the amounts involved, the conditions attached, the security involved and the interest rates will all depend on the institution’s opinion of the firm’s creditworthiness. (3) Finance extended by credit factors. The extent of their charges will be partly dependent upon their assessment of the time it is taking debtors to pay and the bad-debts expense. (4) Pledging of inventory as security for a loan. The lender will want to make an appraisal of the value of the inventory and the speed at which finished goods are being sold. (5) Credit agencies. These will use analyses of published accounts as one measure in their appraisment of a firm’s creditworthiness. (6) Long-term investors, including debenture holders and existing and potential shareholders. Whilst these parties are primarily interested in the long-term profitability of the firm, they are well aware that the deterioration of working capital can force otherwise profitable firms into liquidation. As mentioned in Chapter 1, many progressive, fast expanding firms have been bankrupted because of short-term liquidity problems. Existing shareholders may use the analyses to influence the management into adopting various policies; otherwise the analyses are used in helping decide whether the firm is worth investing in.

Liquidity, Risk and Duration Patterns in Corporate Financing

Abstract: The financial behavior of corporations has changed markedly in the 1961-75 period covered by this study. More debt has been utilized and less of a liquid asset cushion has been maintained. Exhibit 1, which is based on the total manufacturing industry data provided by the FTC Quarterly Financial Report for Manufacturing, reveals an increase in debt (total liabilities) from 34% of total capital in 1961 to almost 50% in 1973. Liquidity, over the same period measured by the ratio of liquid assets to current liabilities, fell from 48% to 24%. Cash and marketable securities as a percent of total assets also dropped to about half their initial 10% level before recovering slightly in the early 1970's. Not only did corporations increase their debt load, they made more extensive use of bank debt. The proportion of total capital furnished by banks doubled over the 1961-75 period, while the non-bank proportion rose relatively modestly and then fell in the 1970's. Presumably, this bank debt was of shorter maturity than financing from non-bank sources. On the other hand, Exhibit 2, which details these trends, also reveals that long term bank debt (more than one year) rose in tandem with short term bank debt. These apparent trends towards more debt, less liquidity, and more extensive use of bank debt appear to be only incidentally affected by recessions (indicated by the shaded areas in the graphs including the "growth recession" of 1967). These secular trends raise the question of whether the fin ncial risk of insolvency has increased. To provide an answer, it is necessary to consider the components of financial risk and how this risk should be measured. In

Determinants of corporate borrowing

Abstract: Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such ‘real options’ depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a suboptimal investment strategy or by forcing the firm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.

Public finance 1816-1939

Abstract: 1 Synopsis.- 1.1 Aim.- 1.2 The available material.- 1.3 Ordinary and extraordinary (capital) expenditure.- 1.4 Revenue and expenditure in Netherlands India and The Netherlands.- 1.5 Adjustment of the available material.- 1.6 What is 'government'?.- 1.7 The monetary unit of the government administration.- 1.7.1 The intrinsic value of the guilder.- 1.7.2 The exchange rate with The Netherlands.- 1.7.3 The guilder and its value in goods.- 1.8 The tables.- 1.9 Sources.- 1.10 Statistical commentaries.- 1.11 No analysis in this documentary collection.- 2 The development of government finances.- 2.1 Constitutional change after the take-over of the United East India Company.- 2.2 The government as spender.- 2.3 The public debt.- 2.3.1 The 'fictitious' loans.- 2.3.2 Loan policy in the twentieth century.- 2.3.3 Post-World War I expansion.- 2.3.4 The pressure of the loan service.- 2.3.5 Assets and debt.- 2.4 The changing pattern of ordinary revenue.- 3 Double entries in the accounts of the financial years 1816-1866.- 3.1 Shortcomings in the pre-1867 statistics.- 3.2 Constitutional requirements.- 3.3 The first statements on Territorial finances.- 3.4 First complete accounts 1846-1866.- 3.5 Indications as to accounting rules.- 3.6 The corrections in Tables 2 and 3 up to 1866.- 4 Corrections for double entries 1900-1939.- A Accounting regulations in general.- 4.1 Double entries.- 4.2 The so-called 'net expenses'.- 4.3 The corrections applied for double entries.- B Changes in public accounting following the application of the 'Indische Bedrijvenwet'.- 4.4 The original rules.- 4.5 The commercial accounts.- 4.6 Changes in the budget following the application of the 'Indische Bedrijvenwet'.- 4.7 The corrections.- 5 Financial policy and the role of extraordinary expenditure.- 6 General remarks on the tables.- 6.1 Presentation of data and commentary on the individual tables.- 6.2 Explanation of symbols.- Tables and commentary on the figures.- 1 Public finance statistics 1867-1939, taken from the Civil Statements.- 2 Public finance, the entire service 1816-1845.- 3 Details of the public finance statistics 1846-1899, taken from the Civil Statements.- 4 Estimate of actual revenue and expenditure of Netherlands India 1900-1939.- 5 Finances of the Principalities and autonomous territories.- 6 Public loans of Netherlands India.- 7 Public Debt and Loan Service of the government of Netherlands India 1911-1940.- Graphs.- I Public Revenue (1817-1939).- II Public Expenditure (1817 1939).- III Public Revenue and Expenditure, totals (1817-1939).

Oil Payments and Oil Debt and the Problem of Adjustment

Abstract: It is still uncertain whether the world economy can adjust to the sharp rise in oil prices without a major loss of output. It is, in other words, uncertain whether all the main aspects of the new situation are sufficiently understood. This chapter deals with four of these aspects: (i) the transfer mechanism, (ii) the nature of the payments problem, (iii) the implications for the oil-importing countries of the large external debt they will have to carry and (iv) their structural adjustment to the higher level of oil prices.1

Regulating Bank Holding Company Capital

Abstract: Since 1970 the nature of bank holding companies has undergone marked change. Prior to 1970, the holding company parent essentially confined its operations to holding the stock of one or more banks. It generally refrained from either direct or indirect participation in nonbanking activities and issued little or no debt. Since the passage of the 1970 amendments to the Bank Holding Company Act, many holding companies have moved aggressively into a variety of nonbanking activities, such as mortgage banking, consumer finance, leasing, insurance and data processing. Also, since 1970 holding company parents have become important financing vehicles for both their bank and nonbank affiliates.

BIHAR-The Bonded of Palamau

Abstract: had placed, for the very large size companies, the growth in net worth at 8,6 per cent. More glaring examples are those of the growth rate in profits after tax (14.6 per cent in the latest study against 25.2 per cent in the previous study for the same year, 1973-74) and debt as percentage of equity (42.7 per cent now against 35.1 per cent in the earlier study for the same year). Even the trend in the percentage of debt to equity would be different if one tried to combine the two studies.

Finance Through Factoring

Abstract: Of all the financial facilities and services that have appeared in the UK in the past ten years or so, probably the least understood is factoring. Pure debt factoring does not attract any supply of finance but is a service. The service is that of keeping the client company's sales ledgers, collecting remittances, providing credit control (deciding the level of credit the client's customers should receive) and guaranteeing payment of debtors' balances if kept within the limit suggested by the factor. It can be seen, therefore, that by using the services of a factoring company it is transferring, for a fee, the responsibility for the control of the investment in trade debtors.

Russia’s public debt and the French market, 1889–1914:A statistical assessment

Abstract: The discussion of Franco—Russian financial relations has always been accompanied by much acrimony and passion. Both on the Russian and on the French side the problem has been charged with emotional overtones. On Russia’s side, there has always been a feeling of humiliation at the thought that ministers of Imperial Russia like those of another Bulgaria or Turkey had to come cap in hand to ask for credit in Paris, pay what many of them considered to be usurious, crippling interest rates and dividends, and on occasion be forced to grant diplomatic or commercial concessions as a quid pro quo for financial assistance.

An empirical study of mortgage payment to income ratios in a variable rate mortgage

Abstract: variable rate rural home mortgage program. The Federal Land Banks constitute a large part of a financial complex called the Farm Credit System. The Farm Credit System is composed of a regulatory agency (The Farm Credit Administration or FCA) and three sets of agricultural banks: The Federal Land Banks (FLBs), the Federal Intermediate Credit Banks (FICBs), and the Banks for Cooperatives (BCs). The FLBs extend long term loans through local Federal Land Bank Associations (FLBAs) for agricultural purposes and to finance rural homes. The FICBs extend short and intermediate term credit through locally owned and managed Production Credit Association (PCAs) for agricultural purposes and, to a minor degree, for rural home financing. The BCs extend both short and long term credit to agricultural cooperatives. The FLBAs, PCAs and BCs are owned by the borrowers who purchase equity in proportion to the amount of funds borrowed. The FLBAs and PCAs own stock in the FLBs and FICBs, respectively. The BCs are directly owned by their cooperative borrowers. Borrower control is exercised through a system of local boards of directors. There are no federal funds invested in the banks. The Farm Credit Banks are unique in several ways. For example, the FLBs can, with FCA approval, change the interest rate on an outstanding mortgage as often as and to the degree considered necessary by their boards of directors.1 A rate change results in a change in the size of the mortgage payment rather than in the maturity.2 The rates charged are not directly linked to any index. The banks attempt to generate revenues sufficient to cover operating expenses, debt costs, losses, and to provide for the accumulation of sufficient equity to serve as a base for future borrowings. Excess earnings can be repaid to the borrowers in the form

Why Not Deregulate Bank Debt Capital

Abstract: Profit-maximizing nonbanking firms often use debt financing as a source of funds. They borrow long-term, repay the specific debt on a scheduled basis, and refinance the debt as needed. Long-term debt financing is part of the firms' overall capital structure. In making these financing decisions, financial managers analyze expected investment returns, costs and risks of alternate sources of funds, and the impact on owner wealth. In contrast to nonbanking firms, banks issued longterm debt instruments primarily during the 1930's. Facing supervisory mandates to increase long-term capital and identifying limited opportunities to sell additional stock, many banks borrowed long-term funds, especially from the Reconstruction Finance Corporation. Under these circumstances, bank debt capital reflected an aura of bank weakness, and issuing banks that survived the 1930's moved rapidly to eliminate stigmatic long-term debt from their balance sheets.