Organizational capital and debt pricing: evidence from bank loans and public bonds

Does the use of tax haven subsidiaries by U.S. multinational corporations affect the cost of bank loans?

This paper proposes the yield spread between public bonds and bank loans of the same firm (the Bond-Bank spread) as a measure of compensation for agency costs that cannot be mitigated by bondholders but can be mitigated by banks due to their ability to monitor the firm and renegotiate the loan. In a model of debt pricing and choice, the tradeoff between firm moral hazard and bank opportunism, leads to co existence of relationship debt (bank loans) and uninformed debt (bonds) in its capital structure. Contrary to common concerns, bank oversight actually increases in the presence of bonds. Using a large and unique data set of bond and bank yields, for the same firm at the same point in time, matched by Credit Rating, Seniority, Maturity and adjusted for collateral differences, it is shown that the Bond - Bank Spread is negative for high credit quality firms and positive for low credit quality firms, consistent with the theoretical model. Applying a new econometric methodology on matching developed by Heckman et al(1998), the results of the sample are confirmed. The Bond - Bank Spread is about -76 basis points for A borrowers, 75 and 53 basis points for BBB and BB borrowers, increasing to 173 and 335 basis points for the B and CCC rated borrowers respectively. Thus agency costs or the specialness of banks seem to be important for BBB and below investment grade firms across the credit spectrum.

Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans

The consolidation and increase in the efficiency of economies is today a priority objective, both at the world level and especially at a European level. But meeting it depends, however, on the nature, size and direction of the influences generated by a whole set of factors. Nevertheless, significant restrictions and advantages come from the way in which financial resources are attracted and used in national economies. This paper aims to study the relationships established between the way in which the need for financial resources of the national economies is covered and their performance, reflected through the evolution of the GDP. In this sense, using the financial information available for European countries, provided by EUROSTAT, OECD and the WB, the connections established between the characteristics of the European financial system (bank loans, market capitalization, loans from private and public bonds) and economic growth are identified and analyzed. This article introduces into the analysis the impact of the investments made in economy, as a source that generates added value, on economic growth. Making a profile of economic effectiveness at a European level (according to the level of financial resources attracted through bank loans, of those drawn through the capital market, and to the size of investments made in economy) allows a punctual evaluation of it, providing clues for any possible strategic corrections. In order to obtain the results of the research, the following tools have been used: the ratio technique, the multiple linear regression analysis and the multiple correspondences factor analysis. The data was processed using the SPSS 19 software.

We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting.

The purpose of this research paper is to find how much risk is involved in investing emerging market debt. Emerging markets are becoming a hub for foreign investors either that is an equity or debt investment. The risk is the important element for investors. As for emerging markets the most important risk that investor can face is exchange rate and political risk. I used Augmented Dickey-Fuller to carry out unit roots and johansen cointegration analysis of exchange rates and political risk in emerging markets. My result shows that individual variables are integrated order one, means unit root exist. This shows that political risk tends to follow a random walk. My finding suggests that there is a long run relationship between political risk and exchange rate. As the political risk increase exchange rate also fluctuate with relation to political situation. Abstract: Using survey data on debt management strategies, this paper studies whether the probability that a country has a debt management strategy, publishes its debt strategy, and uses a benchmark-based strategy is affected by democratic accountability, institutional quality, past debt crises/defaults, IFIs development assistance, and participation in debt management programs. We find that countries located in Latin America and Caribbean are less likely to have developed a debt management strategy and, if they have, they are less likely to publish it. In contrast, countries located in Middle East and North Africa is less likely to use quantitative benchmarks in formulation of their debt management strategy. A country is more likely to have developed a debt management strategy if it has an experience of a past debt crisis, but not of repeated debt crises. Institutional quality and democratic accountability could significantly contribute to emergence of more transparent and accountable debt management strategies in developing countries. IFIs' technical assistance on public debt management could be enhanced Abstract: This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large. Abstract: Using a system of equations approach, this paper empirically tests the impact of credit quality, asset maturity, and other issuer and issue characteristics on the maturity of municipal bonds. The authors find that under conditions of lower information asymmetry that prevails in the municipal sector, higher-rated bonds have longer maturities than low-rated bonds. This result differs from that observed in the corporate sector. Overall, our results support the asset maturity hypothesis. In addittion, our analysis finds that fundamentals matter. Issue features that provide additional protection or convenience to the investor tend to increase debt maturity.

This paper examines the pricing of public debt in a quantitative macroeconomic model with government default risk. Default may occur due to a fiscal policy that does not preclude a Ponzi game. When a build-up of public debt makes this outcome inevitable, households stop lending such that the government has to default. Interest rates on government bonds reflect expectations of this event. There may exist multiple bond prices compatible with a rational expectations equilibrium. We analyze the conditions under which expected default risk premia can quantitatively rationalize sizeable spreads on public bonds. Sovereign default risk premia turn out to emerge at either very high debt to output ratios, or if the variance of productivity shocks is large.

We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social-capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarter relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer bonds over loans. We conclude that debt holders perceive social capital as providing environmental pressure constraining opportunistic firm behaviors in debt contracting.

By studying bond performance of nonfinancial firms with both bank loan and public bonds from 1996 through 2008, I provide evidence that bondholders benefit from bank's influence over firm corporate governance. Both long-term and short-term bond abnormal returns are significantly positive after loan covenant violation. I also find that cross-sectional abnormal bond returns are positively related to bank's incentive to influence. I provide evidence of bank's influence over corporate governance, such as forced CEO turnover and bank directors on board. I show that forced CEO turnover probability is positively related to bank's incentive to influence. Firms with forced CEO turnover or with increasing bank directors experience high long-term abnormal bond returns. Finally, I find that cross-section abnormal stock return is positively related to bank's incentive to influence. I conclude that subsequent bank influence improves corporate governance and creates value for both public bondholders and stockholders.

Using a novel sample covering 3783 US public firms from 2007 to 2020, we examine how negative media coverage of firm‐level environmental, social, and governance (ESG) practices affects a firm's debt choice. We find that firms with higher ESG reputation risk rely more on public bond than bank loan. The social and governance components, in particular, matter. Moreover, firms that receive more negative news coverage display a higher propensity to issue new bonds as opposed to securing new bank debt. Overall, our study presents empirical evidence on the relation between firm ESG reputation risk and debt financing.

Debt maturity and the choice between bank loans and public bonds

Economic theory, as well as commonly-stated views of practitioners, suggests that macroeconomic conditions can affect both the ability and manner in which firms raise external financing. Traditional theory focuses on the demand for capital and suggests that downturns are likely to be associated with a shift in the supply of securities toward less information sensitivity. Alternatively, financing could be affected by supply of capital in terms of both availability of funds and changes in investor preferences during periods of economic uncertainty. We evaluate these hypotheses on a large sample of publicly-traded debt issues, seasoned equity offers, and bank loans. We find that the issuance of convertibles and public bonds, especially those of higher quality, is counter-cyclical, while equity issues and private loans are pro-cyclical. This pattern is consistent with a credit crunch in intermediary capital and a shift towards relatively safe securities during recessions. Moreover, proceeds raised from investment grade bonds are more likely to be held in cash in recessions than in expansions. Poor market conditions also affect the structure of securities offered, shifting them towards shorter maturities and more security. Overall, these findings suggest that the channel through which macroeconomic conditions affect corporate finance is more likely to be the supply of capital rather than the demand.

Debt Issues around Mergers & Acquisitions

This paper investigates whether it is costly for non–financial firms to enter the public bond market, and whether firms benefit from their bond IPOs. We find that both gross spreads and ex-ante credit spreads are higher for IPO bonds, suggesting that firms pay higher underwriting costs on their first public bond. We also find that underpricing in the secondary market is higher for IPO bonds, further suggesting that it is costly to enter the public bond market. The costs of entering the public bond market are economically meaningful and are higher for risky firms. We investigate the benefits from entering the public bond market, by looking at the costs firms pay to raise external funding subsequently to their bond IPOs. Our results show that these benefits exist, but they accrue only to safe firms. These firms benefit from a reduction both in the interest rates they pay on bank loans and the costs they incur to issue private bonds after they enter the public bond market. Together with our the previous findings, these results lend support to the thesis that bond IPOs are unique.

SYNOPSIS This paper presents the first study on the effects of internal control quality on derivatives pricing. Specifically, we utilize data from the credit default swap (CDS) transactions of well-monitored companies to examine the relationship between the quality of internal control and the cost of debt. CDS data are advantageous for the study of this relationship because CDS contracts are comparatively more homogeneous, standardized, and liquid than either bank loans or public bonds. We find that, all else being equal, companies experiencing internal control material weakness (MW) exhibit higher CDS spreads than companies with effective internal control. Moreover, the MW effect on CDS spreads is more pronounced for company-level MWs than for less severe, account-specific MWs. We also document that CDS spreads increase around the filings of MWs. Furthermore, the deterioration of internal control quality is related to increases in CDS spreads. Finally, short-maturity CDS spreads are more affected by MWs than are long-maturity CDS spreads. JEL Classifications: M41; G32; K22. Data Availability: The data are available from public sources.