Showing papers on "Debt published in 2007"
TL;DR: In this article, the authors investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries, and find that both creditor protection through the legal system and information sharing institutions are associated with higher ratios of the private credit to GDP.
1,908 citations
TL;DR: The authors empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members, finding that the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence.
Abstract: I empirically explore the syndicated loan market, with an emphasis on how information asymmetry between lenders and borrowers influences syndicate structure and on which lenders become syndicate members. Consistent with moral hazard in monitoring, the lead bank retains a larger share of the loan and forms a more concentrated syndicate when the borrower requires more intense monitoring and due diligence. When information asymmetry between the borrower and lenders is potentially severe, participant lenders are closer to the borrower, both geographically and in terms of previous lending relationships. Lead bank and borrower reputation mitigates, but does not eliminate information asymmetry problems. SYNDICATED LOANS ARE A LARGE and increasingly important source of corporate finance. Nonfinancial U.S. businesses obtain almost $1 trillion in new syndicated loans each year, which represents approximately 15% of their aggregate debt outstanding, and of the largest 500 nonfinancial firms in the Compustat universe in 2002, almost 90% obtained a syndicated loan between 1994 and 2002. Indeed, according to the American Banker, syndicated lending represents 51% of U.S. corporate finance originated, and generates more underwriting revenue for the financial sector than both equity and debt underwriting (Weidner (2000)). The market for syndicated loans has also experienced strong growth, going from $137 million in 1987 to over $1 trillion today. However, despite the importance of syndicated loans, research on their role in U.S. corporate finance is limited. A syndicated loan is a loan whereby at least two lenders jointly offer funds to a borrowing firm. The “lead arranger” establishes a relationship with the firm, negotiates terms of the contract, and guarantees an amount for a price range.
1,403 citations
TL;DR: In this paper, the authors identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment and show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management.
Abstract: We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations where agency and information problems are relatively more severe, highlighting how the state contingent allocation of control rights can help mitigate investment distortions arising from financing frictions.
1,372 citations
TL;DR: Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts have all been advocated as major explanations for the corporate use of debt financing as mentioned in this paper, and these ideas have often been synthesized into the trade-off theory and the pecking order theory of leverage.
Abstract: Taxes, bankruptcy costs, transactions costs, adverse selection, and agency conflicts have all been advocated as major explanations for the corporate use of debt financing. These ideas have often been synthesized into the trade-off theory and the pecking order theory of leverage. These theories and the related evidence are reviewed in this survey. A number of important empirical stylized facts are identified. To understand the evidence, it is important to recognize the differences among private firms, small public firms and large public firms. Private firms seem to use retained earnings and bank debt heavily. Small public firms make active use of equity financing. Large public firms primarily use retained earnings and corporate bonds. The available evidence can be interpreted in several ways. Direct transaction costs and indirect bankruptcy costs appear to play important roles in a firm's choice of debt. The relative importance of the other factors remains open to debate. No currently available model appears capable of simultaneously accounting for all of the stylized facts.
748 citations
TL;DR: In this paper, the authors investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants and find that covenants can mitigate the agency costs of debt for high growth firms.
Abstract: We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large-sample evidence of the incidence of covenants in public debt and construct firm-level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.
702 citations
Book•
01 Jan 2007
Abstract: List of Boxes and Figures. Foreword. Preface. Acknowledgements. PART I FUNDAMENTALS. 1 Introduction. 1.1 Economic Scenario in the Neoclassical Framework. 1.2 Conventional Debt: A Recipe for Exploitation. 1.3 Growth per se May not Lead to Socio-economic Justice. 1.4 Social Welfare Activities of the States. 1.5 The Main Culprit. 1.6 The Need of the Hour. 1.7 Economics and Religion. 1.8 Islamic Principles Can Make the Difference. 1.9 Regulating Trade and Business. 1.10 Islamic Finance Passing Significant Milestones. 1.11 Could it Work to Achieve the Objectives? 1.12 About this Book. 2 Distinguishing Features of the Islamic Economic System. 2.1 Introduction. 2.2 Islamic Shari'ah and its Objectives. 2.3 Why Study Islamic Economics? 2.4 Islamic Economics: What should it be? 2.5 Paraphernalia of Islamic Economics. 2.6 Summary. 3 The Main Prohibitions and Business Ethics in Islamic Economics and Finance. 3.1 Introduction. 3.2 The Basic Prohibitions. 3.2.1 Prohibition of Riba. 3.3 Business Ethics and Norms. 3.4 Summary and Conclusion. 4 The Philosophy and Features of Islamic Finance. 4.1 Introduction. 4.2 The Philosophy of Islamic Finance. 4.3 Debt versus Equity. 4.4 Islamic Banking: Business versus Benevolence. 4.5 Exchange Rules. 4.6 Time Value of Money in Islamic Finance. 4.7 Money, Monetary Policy and Islamic Finance. 4.8 Summary. PART II CONTRACTUAL BASES IN ISLAMIC FINANCE. 5 Islamic Law of Contracts and Business Transactions. 5.1 Introduction. 5.2 Mal (Wealth), Usufruct and Ownership. 5.2.1 Defining Various Related Terms. 5.3 General Framework of Contracts. 5.4 Elements of a Contract. 5.5 Broad Rules for the Validity of Mu'amalat. 5.6 W'adah (Promise) and Related Matters. 5.7 Types of Contracts. 5.8 Commutative and NonCommutative Contracts. 5.9 Conditional or Contingent Contracts. 5.10 Summary. 6 Trading in Islamic Commercial Law. 6.1 Introduction. 6.2 Bai' - Exchange of Values. 6.3 Legality of Trading. 6.3.1 Trade (Profit) versus Interest: Permissibility versus Prohibition. 6.4 Types of Bai'. 6.5 Requirements of a Valid Sale Contract. 6.6 Riba Involvement in Sales. 6.7 Gharar - A Cause of Prohibition of Sales. 6.8 Conditional Sales and "Two Bargains in One Sale" 6.9 Bai' al'Arbun (Downpayment Sale). 6.10 Bai' al Dayn (Sale of Debt). 6.11 Al 'Inah Sale and the Use of Ruses (Hiyal). 6.12 Options in Sales (Khiyar). 6.13 Summary. 7 Loan and Debt in Islamic Commercial Law. 7.1 Introduction. 7.2 The Terms Defined. 7.3 Illegality of Commercial Interest. 7.4 Loaning and the Banking System. 7.5 Guidance from the Holy Qur'an on Loans and Debts. 7.6 The Substance of Loans. 7.7 Repayment of the Principal Only. 7.8 Time Value of Money in Loans and Debts. 7.9 Instructions for the Debtor. 7.10 Instructions for the Creditor. 7.11 Husnal Qadha (Gracious Payment of Loan/Debt). 7.12 Remitting a Part of a Loan and Prepayment Rebate. 7.13 Penalty on Default. 7.13.1 Insolvency of the Debtor. 7.14 Hawalah (Assignment of Debt). 7.15 Security/Guarantee (Kafalah) in Loans. 7.16 Bai' al Dayn (Sale of Debt/Debt Instruments). 7.17 Impact of Inflation on Loans/Debts. 7.18 Summary. PART III ISLAMIC FINANCE - PRODUCTS AND PROCEDURES. 8 Overview of Financial Institutions and Products: Conventional and Islamic. 8.1 Introduction. 8.2 What is Banking or a Bank? 8.3 The Strategic Position of Banks and Financial Institutions. 8.4 Categories of Conventional Financial Business. 8.5 The Need for Islamic Banks and NBFIs. 8.6 The Issue of Mode Preference. 8.7 Islamic Investment Banking. 8.8 Islamic Financial Markets and Instruments. 8.9 Summary and Conclusion. 9 Murabaha and Musawamah. 9.1 Introduction. 9.2 Conditions of Valid Bai'. 9.3 Murabaha - a Bai' al Amanah. 9.4 Bai' Murabaha in Classical Literature. 9.5 The Need for Murabaha. 9.6 Specific Conditions of Murabaha. 9.6.1 Bai' Murabaha and Credit Sale (Murabaha-Mu'ajjal). 9.7 Possible Structures of Murabaha. 9.8 Murabaha to Purchase Orderer (MPO). 9.9 Issues in Murabaha. 9.10 Precautions in Murabaha Operations. 9.11 Musawamah (Bargaining on Price). 9.12 Summary. 10 Forward Sales: Salam and Istisna'a. 10.1 Introduction. 10.2 Bai' Salam/Salaf. 10.3 Benefits of Salam and the Economic Role of Bai' Salam. 10.4 Features of a Valid Salam Contract. 10.5 Security, Pledge and Liability of the Sureties. 10.6 Disposing of the Goods Purchased on Salam. 10.6.1 Alternatives for Marketing Salam Goods. 10.7 Salam - Post Execution Scenarios. 10.8 Salam-Based Securitization - Salam Certificates/Sukuk. 10.9 Summary of Salam Rules. 10.10 Salam as a Financing Technique by Banks. 10.11 Istisna'a (Order to Manufacture). 11 Ijarah - Leasing 279. 11.1 Introduction. 11.2 Essentials of Ijarah Contracts. 11.3 General Juristic Rules of Ijarah. 11.4 Modern Use of Ijarah. 11.5 Islamic Banks' Ijarah Muntahia-bi-Tamleek. 11.6 Summary of Guidelines for Islamic Bankers on Ijarah. 12 Participatory Modes: Shirkah and its Variants. 12.1 Introduction. 12.2 Legality, Forms and Definition of Partnership. 12.3 Basic Rules of Musharakah. 12.4 The Concept and Rules of Mudarabah. 12.5 Mudarabah Distinguished from Musharakah. 12.6 Modern Corporations: Joint Stock Companies. 12.7 Modern Application of the Concept of Shirkah. 12.8 Diminishing Musharakah. 12.9 Diminishing Musharakah as an Islamic Mode of Finance. 12.10 Summary and Conclusion. 13 Some Accessory Contracts. 13.1 Introduction. 13.2 Wakalah (Agency). 13.3 Tawarruq. 13.4 Ju'alah 13.5 Bai' al Istijrar (Supply Contract). 14 Application of the System: Financing Principles and Practices. 14.1 Introduction. 14.2 Product Development. 14.3 The Nature of Financial Services/Business. 14.4 Prospects and Issues in Specific Areas of Financing. 14.5 Islamic Banks' Relationship with Conventional Banks. 14.6 Fee-based Islamic Banking Services. 14.7 Summary and Conclusion. Appendix: The Major Functions of a Shari'ah Supervisory Board in the Light of the AAOIFI'S Shar ~ i'ah Standard. 15 Sukuk and Securitization: Vital Issues in Islamic Capital Markets. 15.1 Introduction. 15.2 The Capital Market in an Islamic Framework. 15.3 Securitization and Sukuk. 15.4 Summary and Conclusion. 16 Takaful: An Alternative to Conventional Insurance. 16.1 Introduction. 16.2 The Need for Takaful Cover. 16.3 The Shari'ah Basis of Takaful. 16.4 How the Takaful System Works. 16.5 Takaful and Conventional Insurance Compared. 16.6 Status and Potential of the Takaful Industry. 16.7 Takaful Challenges. Appendix: Fatawa (Juristic Opinions) on Different Aspects of Insurance. 17 An Appraisal of Common Criticism of Islamic Banking and Finance. 17.1 Introduction. 17.2 The Common Myths and Objections. 17.3 Appraisal of Conceptual Criticism. 17.4 Appraisal of Criticism on Islamic Banking Practice. 17.5 Conclusion. 18 The Way Forward. 18.1 Introduction. 18.2 Agenda for the Policymakers. 18.3 Potential, Issues and Challenges for Islamic Banking. 18.4 Conclusion. Acronyms. Glossary. References. Arabic/Urdu References. Suggested Further Reading. Index.
687 citations
TL;DR: The authors investigate the incentives that led to the rash of restated financial statements at the end of the 1990s market bubble and find that the likelihood of a misstated financial statement increases greatly when the CEO has very sizable holdings of in-the-money stock options.
660 citations
TL;DR: This article found that borrowers with greater information asymmetries are significantly more likely to obtain future loans from relationship lenders than non-relationship lenders, and that relationship lenders are likely to be chosen to provide debt/equity underwriting services.
628 citations
TL;DR: This article showed that while cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt is a more effective way to boost investment in future high cash flow states.
619 citations
TL;DR: In this article, the authors implemented a randomized field experiment to ask whether provision of insurance against a major source of production risk induces farmers to take out loans to adopt a new crop technology.
588 citations
TL;DR: In this paper, the authors examine how suppliers may have a comparative advantage over banks in lending to customers because they are able to stop the supply of intermediate goods and act as liquidity providers.
Abstract: This article examines how in a context of limited enforceability of contracts suppliers may have a comparative advantage over banks in lending to customers because they are able to stop the supply of intermediate goods. Suppliers may act also as liquidity providers, insuring against liquidity shocks that could endanger the survival of their customer relationships. The relatively high implicit interest rates of trade credit are the result of insurance and default premiums that are amplified whenever suppliers face a relatively high cost of funds. I explore these effects empirically for a panel of UK firms.
Book•
16 Apr 2007
TL;DR: In this paper, the authors present a systematic and integrated approach to finance public-private partnerships (PPPs) within a public-policy framework, and explain the project-finance techniques used for this purpose.
Abstract: Over the last decade or so, private-sector financing through public-private partnerships (PPPs) has become increasingly popular around the world as a way of procuring and maintaining public-sector infrastructure, in sectors such as transportation (roads, bridges, tunnels, railways, ports, airports), social infrastructure (hospitals, schools, prisons, social housing) public utilities (water supply, waste water treatment, waste disposal), government offices and other accommodation, and other specialised services (communications networks or defence equipment). This book, based on the author's practical experience on the public- and private-sector sides of the table, reviews the key policy issues which arise for the public sector in considering whether to adopt the PPP procurement route, and the specific application of this policy approach in PPP contracts, comparing international practices in this respect. It offers a systematic and integrated approach to financing PPPs within this public-policy framework, and explains the project-finance techniques used for this purpose. The book deals with both the Concession and PFI models of PPP, and provides a structured introduction for those who are new to the subject, whether in the academic, public-sector, investment, finance or contracting fields, as well as an aide memoire for those developing PPP policies or negotiating PPPs. The author focuses on practical concepts, issues and techniques, and does not assume any prior knowledge of PPP policy issues or financing techniques. The book describes and explains: the different types of PPPs and how these have developed; why PPPs are attractive to governments; general policy issues for the public sector in developing a PPP programme; PPP procurement procedures and bid evaluation; the use of project-finance techniques for PPPs; sources of funding; typical PPP contracts and sub-contracts, and their relationship with the project's financial structure; risk assessment from the points of view of the public sector, investors, lenders and other project parties; structuring the investment and debt financing; and, the key issues in negotiating a project-finance debt facility. In addition, the book includes an extensive glossary, as well as cross-referencing. It reviews the PPP policy framework and development from an international perspective. It covers public- and private-sector financial analysis, structuring and investment in PPPs. No prior knowledge of project financing required.
Book•
01 Jan 2007
TL;DR: In Debt Defaults and Lessons from a Decade of Crises, Federico Sturzenegger and Jeromin Zettelmeyer examine the facts, the economic theory, and the policy implications of sovereign debt crises as discussed by the authors.
Abstract: Detailed case studies of debt defaults by Russia, Ukraine, Pakistan, Ecuador, Moldova, and Uruguay, framed by a comprehensive discussion of the history, economic theory, legal issues, and policy lessons of sovereign debt crises. The debt crises in emerging market countries over the past decade have given rise to renewed debate about crisis prevention and resolution. In Debt Defaults and Lessons from a Decade of Crises, Federico Sturzenegger and Jeromin Zettelmeyer examine the facts, the economic theory, and the policy implications of sovereign debt crises. They present detailed case histories of the default and debt crises in seven emerging market countries between 1998 and 2005: Russia, Ukraine, Pakistan, Ecuador, Argentina, Moldova, and Uruguay. These accounts are framed with a comprehensive overview of the history, economics, and legal issues involved and a discussion from both domestic and international perspectives of the policy lessons that can be derived from these experiences. Sturzenegger and Zettelmeyer examine how each crisis developed, what the subsequent restructuring encompassed, and how investors and the defaulting country fared. They discuss the new theoretical thinking on sovereign debt and the ultimate costs entailed, for both debtor countries and private creditors. The policy debate is considered first from the perspective of policymakers in emerging market countries and then in terms of international financial architecture. The authors' surveys of legal and economic issues associated with debt crises, and of the crises themselves, are the most comprehensive to be found in the literature on sovereign debt and default, and their theoretical analysis is detailed and nuanced. The book will be a valuable resource for investors as well as for scholars and policymakers.
TL;DR: In this article, the authors developed an agency model of financial contracting and derived long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics.
Abstract: We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics. The optimal debt-equity ratio is history dependent, but debt and credit line terms are independent of the amount financed and, in some cases, the severity of the agency problem. In our model, the agent can divert cash flows; we also consider settings in which the agent undertakes hidden effort, or can control cash flow risk.
TL;DR: In this article, the authors make the long-term goal of comprehensive civil registration in developing countries the expectation rather than the exception, and the international health community can assist by sharing information and methods to ensure both the quality of vital statistics and cause of death data.
TL;DR: The authors examined the impact of fiscal rules and budget procedures in EU countries on public finances and found that centralization of budgeting procedures restrains public debt in countries with one-party governments or coalition governments where parties are closely aligned and where political competition among them is low.
TL;DR: In this article, a levered firm's choice of investment between innovative and conservative technologies, on the one hand, and of financing between debt and equity, was considered and evidence that the answer to this question is yes.
Abstract: Do legal institutions governing financial contracts affect the nature of real investments in the economy? We develop a simple model and provide evidence that the answer to this question is yes. We consider a levered firm's choice of investment between innovative and conservative technologies, on the one hand, and of financing between debt and equity, on the other. Bankruptcy code plays a central role in these choices by determining whether the firm is continued or liquidated in case of financial distress. When the code is creditor-friendly, excessive liquidations cause the firm to shy away from innovation. In contrast, by promoting continuation upon failure, a debtor-friendly code induces greater innovation. This effect remains robust when the firm attempts to sustain innovation by reducing its debt under creditor-friendly codes. Employing patents as a proxy for innovation, we find support for the real as well as the financial implications of the model: (1) In countries with weaker creditor rights, technologically innovative industries create disproportionately more patents and generate disproportionately more citations to these patents relative to other industries; (2) This difference of difference result is further confirmed by within-country analysis that exploits time-series changes in creditor rights, suggesting a causal effect of bankruptcy codes on innovation; (3) When creditor rights are stronger, innovative industries employ relatively less leverage compared to other industries; and (4) In countries with weaker creditor rights, technologically innovative industries grow disproportionately faster compared to other industries. Finally, while overall financial development fosters innovation, stronger creditor rights weaken this effect, especially for highly innovative industries.
TL;DR: In this article, the authors study CEO pension arrangements in 237 large capitalization firms and find that CEO compensation exhibits a balance between debt and equity incentives, and the balance shifts systematically away from equity and toward debt as CEOs grow older.
Abstract: Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.
TL;DR: Overall, the findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.
Abstract: While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of 60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and use of financial debt even though the effect is dampened for small firms. More strikingly, young firms benefit most from foreign bank presence, while businesses connected to domestic banks or to the government suffer. Overall, our findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.
TL;DR: Li et al. as discussed by the authors explored the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms and found that state ownership is positively associated with leverage and firms' access to long-term debt, while foreign ownership is negatively associated with all measures of leverage.
Abstract: We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms' access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to six percent of the total variation in firms' leverage decisions, while firm characteristics alone explain no more than eight percent of the variation. Finally, we show that the negative effect of institutional development on firms' access to long-term debt is mitigated when the level of state or foreign ownership is high, and state ownership plays no role in foreign-controlled firms' access to long-term debt while its positive effect on access to long-term debt is strengthened for firms in well developed regions. Our evidence is consistent with state-owned banks' incentives to grant long-term loans only to state-owned firms in the absence of well-developed risk management.
TL;DR: This paper explored the role of gender in bank lending decisions, focusing on the criteria and processes used by male and female loan officers, revealing similarities in the criteria used to assess male applicants but show modest differences in the emphasis given to certain criteria by female lending officers.
Abstract: Previous research provides unequivocal evidence that women-owned businesses start with both lower levels of overall capitalization and lower ratios of debt finance. Structural dissimilarities between male-owned and female-owned businesses explain most, but by no means all, of these contrasting funding profiles. Explanations of residual differences, viewed in terms of supply-side discrimination or demand-side debt and risk aversion, remain controversial. Using experimental and qualitative methodologies, this study explores the role of gender in bank lending decisions, focusing on the criteria and processes used by male and female loan officers. Results reveal similarities in the criteria used to assess male and female applicants but show modest differences in the emphasis given to certain criteria by male and female lending officers. The processes used by male and female lending officers to negotiate loan applications revealed the greatest differences.
TL;DR: In this article, the authors examined the relationship between corporate governance and the capital structure decisions of listed firms in Ghana and found statistically significant and positive associations between capital structure and board size, board composition, and CEO duality.
Abstract: Purpose – This paper seeks to examine the relationship between corporate governance and the capital structure decisions of listed firms in Ghana.Design/methodology/approach – Multiple regression analysis is used in the study in estimating the relationship between the corporate governance characteristics and capital structure.Findings – The empirical results show statistically significant and positive associations between capital structure and board size, board composition, and CEO duality. The results generally indicate that Ghanaian listed firms pursue high debt policy with larger board size, higher percentage of non‐executive directors, and CEO duality. The results also show a negative (though statistically insignificant) relationship between the tenure of the CEO and capital structure, suggesting that, entrenched CEOs employ lower debt in order to reduce the performance pressures associated with high debt capital.Originality/value – The main value of this paper is the analysis of the effect of corporat...
TL;DR: In this paper, the authors develop and test a new theory of security issuance that is consistent with the puzzling stylized fact that firms issue equity when their stock prices are high, thus maximizing the likelihood of agreement with investors.
Abstract: We develop and test a new theory of security issuance that is consistent with the puzzling stylized fact that firms issue equity when their stock prices are high. The theory also generates new predictions. Our theory predicts that managers use equity to finance projects when they believe that investors’ views about project payoffs are likely to be aligned with theirs, thus maximizing the likelihood of agreement with investors. Otherwise, they use debt. We find strong empirical support for our theory and document its incremental explanatory power over other security-issuance theories such as market timing and time-varying adverse selection. A CENTRAL QUESTION IN CORPORATE FINANCE IS: Why and when do firms issue equity? Recent empirical papers have exposed significant gaps between the stylized facts and theories of security issuance and capital structure, so we seem to lack a coherent answer to this question. Our purpose is to develop a new theory of security issuance that is consistent with these difficult-to-explain stylized facts. One empirical regularity is the genesis of the current debate: Firms issue equity when their stock prices are high. This fact is inconsistent with the two main theories of security issuance and capital structure: tradeoff and pecking order. The tradeoff theory asserts that a firm’s security issuance decisions move its capital structure toward an optimum that is determined by a tradeoff between the marginal costs (bankruptcy and agency costs) and benefits (debt tax shields and reduction of free cash flow problems) of debt. Thus, an increase in a firm’s stock price, which effectively lowers its leverage ratio, should lead to debt issuance. However, the evidence suggests the opposite is true. While CEOs do consider stock prices to be a key factor in security issuance decisions (Graham and Harvey (2001)), firms issue equity rather than debt when stock prices are high (e.g., Asquith and Mullins (1986), Baker and Wurgler (2002), Jung, Kim, and Stulz (1996), Marsh (1982), and Mikkelson and Partch (1986)). Moreover, Welch (2004) finds that firms let their leverage ratios drift with their stock
TL;DR: In this paper, the authors investigate the link between a firm's leverage and the characteristics of its suppliers and customers and find a positive relation between firm debt level and the degree of concentration in supplier/customer industries.
TL;DR: In this article, the impact of capital structure on the performance of micro finance institutions was examined in sub-Saharan Africa, where the authors found that highly leveraged microfinance institutions perform better by reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral hazard and adverse selection.
Abstract: Purpose – The purpose of this paper is to examine the impact of capital structure on the performance of microfinance institutions.Design/methodology/approach – Panel data covering the ten‐year period 1995‐2004 were analyzed within the framework of fixed‐ and random‐effects techniques.Findings – Most of the microfinance institutions employ high leverage and finance their operations with long‐term as against short‐term debt. Also, highly leveraged microfinance institutions perform better by reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral hazard and adverse selection, enhancing their ability to deal with risk.Originality/value – This is the first study of its kind in the sector, especially within sub‐Saharan Africa.
Posted Content•
TL;DR: In this article, the authors use a new panel dataset of credit card accounts to analyze how consumer responded to the 2001 Federal income tax rebates and find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt.
Abstract: We use a new panel dataset of credit card accounts to analyze how consumer responded to the 2001 Federal income tax rebates We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt But soon afterwards their spending increased, counter to the canonical Permanent-Income model Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers More generally, the results suggest that there can be important dynamics in consumers' response to 'lumpy' increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms
Posted Content•
TL;DR: The authors found evidence that debt affects students academic decisions during college and also showed that debt reduces students donations to the institution in the years after they graduate and increases the likelihood that a graduate will default on a pledge made during her senior year; this result is more likely consistent with credit constraints than with debt aversion.
Abstract: In the early 2000s, a highly selective university introduced a no-loans policy under which the loan component of financial aid awards was replaced with grants. We use this natural experiment to identify the causal effect of student debt on employment outcomes. In the standard life-cycle model, young people make optimal educational investment decisions if they are able to finance these investments by borrowing against future earnings; the presence of debt has only income effects on future decisions. We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid public interest jobs. We also find some evidence that debt affects students academic decisions during college. Our estimates suggest that recent college graduates are not life-cycle agents. Two potential explanations are that young workers are credit constrained or that they are averse to holding debt. We find suggestive evidence that debt reduces students donations to the institution in the years after they graduate and increases the likelihood that a graduate will default on a pledge made during her senior year; we argue this result is more likely consistent with credit constraints than with debt aversion.
TL;DR: This paper examined how a shock to collateral value influences firms' debt capacities and investments and found that firms with greater collateral losses are less likely to sustain their banking relationships and tend to obtain a smaller amount of bank credit.
TL;DR: In this paper, the authors develop a Q theory of investment under financing constraints, where the firm invests and saves optimally facing convex costs of external equity, overhang from outstanding debt, and collateral constraints on new borrowing.
Posted Content•
TL;DR: In this article, the authors present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders, and show that emerging economies pay a positive term premium (a higher risk premium on longterm bonds than on short-term bonds).
Abstract: We argue that emerging economies borrow short term due to the high risk premium charged by bondholders on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a rollover crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term debt and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting towards shorter maturities. The evidence suggests that international investors' time-varying risk aversion is crucial to understand the debt structure in emerging economies.