Debt Choice Research Articles

Corporate debt choice and bank capital regulation

This paper proposes a macro-banking model with corporate debt choice and investigates the impacts of bank capital regulation. Compared to non-banks, banks provide restructurable debt that resolves firm liquidations. Capital regulation corrects deposit insurance distortions but reduces bank debt supply. The model calibrated to the U.S. economy suggests that the non-bank market booms in the short run but shrinks in the long run when capital requirements are tightened. While banks get stabilized, firms encounter liquidations more frequently despite their deleveraging. Welfare improves under tighter and counter-cyclical capital requirements.

Debt dynamic, debt dispersion and corporate governance

PurposeThis paper addresses the following questions: Why do some firms employ multiple debt types? What explains debt heterogeneity? Is the choice of the source of debt a function of corporate governance?Design/methodology/approachThe author's paper is empirical and uses multiple regression analysis.FindingsFirms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Contrastingly, firms that are well-managed tend to concentrate debt and borrow predominantly from a few creditors. The author also found that while bank debt is negatively associated with debt concentration, market debt is positively associated with debt concentration.Research limitations/implicationsFirms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Well-managed firms tend to concentrate debt and borrow predominantly from a few creditors. Bank debt is negatively associated with debt concentration and market debt is positively associated with debt concentration.Practical implicationsPolicymakers and practitioners need to account not only for changes in the firm’s total debt level but also for changes within the firm’s debt composition. Understanding a manager’s choice of debt structure can incentivize creditors to effectively monitor and use debt concentration as a form of commitment device that transfers some control rights from the manager to creditors.Originality/valueWhile a vast body of corporate finance literature examines the conflict between shareholders and management, there is little empirical work on the conflict between creditors and management. In this paper, the author examines how managerial entrenchment affects debt structure. The results provide a comprehensive picture of how corporate governance influences debt choice(s).

Institutional investors distraction and debt choice

PurposeThis study aims to investigate the impact of institutional investors distraction on firms' choice between bank debt and public debt.Design/methodology/approachThe study employs the measure of institutional investors distraction from Kempf et al. (2017), which captures exogenous attention-grabbing events in other aspects of institutional investors' portfolios holdings to examine this research question. The study uses a sample of 16,047 firm-year observations comprising 2,521 US firms for the period of 2000–2016.FindingsThe result shows a significant positive association between institutional shareholder distraction and firms' bank ratio. Cross-sectional tests show that the positive association between institutional shareholders distraction and firms' bank ratio is stronger for firms in poorer information environments and for firms facing greater competitive threats from rivals.Originality/valueThis study underscores the important governance role played by institutional shareholders and the consequence when such a monitoring role is impaired. In particular, firms with distracted shareholders rely on expensive bank monitoring and scrutiny to supply their additional monitoring capacity.

Audit committee characteristics and debt choice: evidence from the S&P 500

ABSTRACT This study examines the impact of audit committee (AC) characteristics on firms’ debt choice. Specifically, we focus on AC independence, the frequency of meetings, financial experts, gender diversity, and the gender of the AC chair. The sample of this study is composed of 300 firms listed on the S&P 500. To examine the impact of the composition of the AC on debt choice, we use Ordinary Least Squares (OLS) regression and Tobit regression. The empirical findings reveal that the number of independent directors, the ratio of female directors, and a female AC chair are positively associated with public debt. This finding is in line with ‘the bank monitoring substitution hypothesis’ that the AC’s mentioned features substitute for the monitoring role of the bank. On the other hand, the frequency of AC meetings and the ratio of financial experts on the AC are negatively associated with public debt. The findings of this study offer some important insights for policy implications. For instance, firms can access the public debt market by increasing the number of independent directors, improving the gender diversity of the AC, and appointing a female AC chair.

Product Market Competition and Debt Choice: A Study on Cement Companies Enlisted in Capital Market in Bangladesh

<i>Purpose: </i>This study aims to contribute to this body of knowledge by examining the effect of product market competitiveness on enterprises' dependence on bank loans. <i>Design/methodology/approach:</i> To examine the effect of product market rivalry on loan selection, we look at a sample of Bangladeshi firms from 2010 to 2020. We limit our research to publicly traded corporations since they often choose between public and private debt. The generalized least square (GLS) model is applied to identify the effect of product market competitiveness on enterprises' dependence on bank loans. <i>Findings: </i>Using a sample of 60 firms, between 2010 and 2020, we discovered that product market competition encouraged enterprises to rely less on bank loan funding. Additionally, we demonstrate that competitive pressure has a more significant impact on debt selection for firms that are more exposed to competition, face more significant financial constraints, and have less robust governance practices. Additionally, we observe a correlation between competition in the product market and long-term maturity debt. A critical insight we establish in our study is that external governance pressure from the product market can act as a replacement for the monitoring of bank debt.<i> Research limitations/implications: </i>Despite the DSE having 308 listed businesses, the study only considers the top 60 as market capitalization. As a result, the small sample size may limit the generalizations that can be derived from our findings. Another disadvantage is that the study only looked at cement businesses, even though the DSE has a variety of companies listed.<i> Originality/value:</i> Our research paper contributes to the existing literature on Product Market Competition and Debt Choice in an emerging market like Bangladesh. To the best of the authors' knowledge, no study has yet been conducted on the Product Market Competition and Debt Choice for taking five-year financial statements in Bangladesh.

Institutional Investors Distraction and Debt Choice

Institutional Investors Distraction and Debt Choice

Project finance and recourse loans: determining debt choices in political, economic and financial risk positions under global perspective

Project finance and recourse loans: determining debt choices in political, economic and financial risk positions under global perspective

The Impact Analysis of Investment Decisions on Taxations of Corporate Organisations: An Empirical Studies from Nigeria

The research work titled “impact analysis of investment decisions on taxations of corporate organisations in Nigeria” was carried out with the primary aims of investigating whether the choice debt over equity has significant impact on taxes in Nigeria. It also surveyed on the influence of capital expenditure of corporate entities on their taxes and whether the working capital management can be used in tax planning of corporations in Nigeria. The original propositions, as well as the principles of Modigliani and Miller's Theorem (1958), indicate that there is a completely efficient market with no taxes, transactions, or bankruptcy costs, and that all participants have access to a wealth of information. Modigliani and Miller included the influence of taxes to their model in 1963, bringing the theory closer to reality (Adegbite and Shittu, 2017). The researcher opted to limit the study to an object (i.e. Federal Capital Territory Abuja) thereby selecting 5 industries selected from the Nigerian Stock Exchange to include Financial services, construction/real estate, oil and gas, consumer goods and information and communication technology (ICT) with a total of five (5) corporate organizations as respondents Selected from the population. In terms of the research issue, the findings were expanded to the entire population. At the conclusion of the study, the researcher determined that the choice of debt over equity, capital expenditure, and working capital over taxes of business organizations in Nigeria had no statistically significant influence. The researcher finally recommended that enough processes should be in place at all times to ensure that all types of taxes in Nigeria are correctly accounted for and filed with the relevant tax authority and that corporate organisations in Nigeria require the services of tax consultants in order to incorporate proper tax planning mechanism in their business dealings.

Labor lawsuits and debt maturity

PurposeThis paper aims to investigate how firms’ relationships with employees define their debt maturity. The authors empirically test the role of employee litigations in influencing firms’ choice of short-term versus long-term debt. The authors study employee relations by analyzing the importance of the workplace environment on capital structure.Design/methodology/approachThe author’s test hypotheses using a sample of US publicly traded firms between 2000 and 2017, including 3,056 unique firms with 4,256 unique chief executive officer, adopting the fixed effect panel model.FindingsThe authors document that employee litigations have a significant negative effect on the use of short-term debt and a significant positive affect on long-term debt. Employee litigations, along with legal fees, outcomes and charging parties, matter the most in explaining debt maturity. In addition, frequently sued firms abandon the short-term debt market and use less shareholders’ equity to finance their operations while relying more on the longer debt market.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the role of employee mistreatment in debt maturity choice. The study extends the lawsuit and finance literature by examining unique, hand-collected data sets of employee lawsuits, allegations, violations, settlements, charging parties, case outcomes and case durations.

National culture and the choice between bank debt and public debt

In this study, we investigate the role of national culture in firms' choice between bank debt and public debt. We postulate that culture influences corporate debt choice through five channels. Using a new international dataset on debt structure and a large sample of firms from 30 countries, we find that Schwartz's cultural dimensions shape firms' debt choice. We show that Egalitarianism has a negative and significant association with bank debt financing and that Embeddedness has a positive and significant association with it. These results hold after conducting several endogeneity and robustness tests. In addition, when using Hofstede's cultural dimensions as alternative cultural dimensions, we find that the results are generally consistent with those obtained with Schwartz's cultural dimensions.

Board reforms and debt choice

In this study, we examine the impact of board reforms on the choice between bank and public debt. Using a large sample of firm-year observations from 29 countries and a difference-in-difference setting, we find that major board reforms lead to a decrease in bank debt ratio, particularly in companies where bank debt is used for monitoring purposes, suggesting that bank debt and board reforms are substitutes for monitoring managers' actions. We also find that board reforms' adoption is associated with a facilitated access to alternative financing sources with better terms than bank debt. In an additional analysis, we show that the decrease in bank debt ratio is stronger for firms with higher information opacity and those in countries with strong institutional environment. More importantly, we provide evidence that the decrease in bank debt post-reform increases firm value, indicating that the substitution between bank monitoring and board monitoring is a value-enhancing decision. Taken collectively, we conclude that the need for bank monitoring is endogenously determined by the strength of alternative governance mechanisms (i.e. board governance).

Role of Institutional Investors: Evidence from the Foreign Rule-144A Debt Market

We examine the unique role played by institutional investors in the private corporate debt market for Rule 144A debt. We use the recent global financial crisis as a quasi-natural experiment to study how qualified institutional buyers (QIBs) facilitated funding to the foreign debt issuers in U.S. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine (a) corporate decisions involving debt choice and market timing, and (b) determination of offer spreads. Our findings collectively support the notion that QIBs enabled funding in the foreign 144A debt market despite the financial crisis.

Labor Mobility Restrictions and Debt Choice: Evidence from the Inevitable Disclosure Doctrine

Labor Mobility Restrictions and Debt Choice: Evidence from the Inevitable Disclosure Doctrine

The CSPP impact on non-financial firms’ cost of borrowing and debt choice

In this study, we examine the impact of the European Central Bank’s (ECB) corporate sector purchase programme (CSPP) on euro area non-financial firms’ cost of borrowing and choice between bank and public debt. Using a large sample of corporate bonds and syndicated loans closed between 2000 and 2019, we find that the CSPP reduced corporate bond spreads significantly, in both announcement and implementation periods. Findings also suggest that the CSPP had a positive spillover effect into the syndicated loan market during the implementation period. Our results show that there is a substitution effect between eligible bonds and equivalent loans, with non-financial firms choosing to use more corporate bonds than syndicated loan deals after the CSPP announcement, and that this effect is more important for non-switchers, those that may have more difficulty in accessing the bond market. Finally, we provide evidence that, when controlling for the CSPP, borrowers that choose corporate bonds are larger, more profitable, and have larger growth opportunity sets; and switchers with high agency costs of debt prefer bank debt.

Corporate Debt Choice and Bank Capital Regulation

Corporate Debt Choice and Bank Capital Regulation

Project finance and recourse loans: determining debt choices in political, economic and financial risk positions under global perspective

Project finance and recourse loans: determining debt choices in political, economic and financial risk positions under global perspective

Debt choice, growth opportunities and corporate investment: evidence from China

The study aims to investigate how relying on short-term debt may help Chinese listed firms to make efficient investment decisions and reduce overinvestment problem for low-growth firms. The study uses a large set of panel data of non-financial Chinese listed firms over the period 2007–2017 and, using the robust two-stage generalized method of moments, which is robust to unobserved heterogeneity of individual firms and addresses endogeneity issues. Findings show a positive relationship between growth and investment; this association is enhanced by leverage, especially for high-growth firms. This supports the view that short-term debt helps Chinese firms to make optimal use of leverage and therefore make better investment decisions. Furthermore, the results reveal that leverage plays a disciplining and monitoring role to reduce overinvestment incentive for low-growth firms. Overall, the study suggests that shareholders should consider short-term debt to mitigate the debt overhang problem and restrict the opportunistic behavior of managers, which can lead to efficient investment decisions. It also provides foreign investors insights about capital structure in China, and how it can help them make better investment decisions.

Capital Structure and Firm Performance in Australian Service Sector Firms: A Panel Data Analysis

Using cross-sectional panel data over eleven years (2009–2019), or 1001 firm-year observations, this study examines the relationship between capital structure and firm performance of service sector firms from Australian stock market. Unlike other studies, in this study directional causalities of all performance measures were used to identify the cause of firm performance. The study finds that long-term debt dominates debt choices of Australian service sector companies. Although the finding is to some extent similar to trends in debt financed operations observed in companies in developed and developing countries, the finding is unexpected because the sectoral and institutional borrowing rules and regulations in Australia are different from those in other parts of the world.

Factors affecting Financing Decision of Indian Power &amp; Energy Sector and Testing of Capital Structure Theories: Panel Data Analysis

Capital structure (CS) is defined as combination of various sources of funds employed in business. Appropriate source of financing is inevitable for any company to exist. Present paper analyses the determinants affecting the choice of debt or equity of selected power and energy sector companies of India. For the purpose of empirical testing, panel data of 25 listed companies has been collected for 10 years (2010-2019). Based on panel regression model, the study concludes that profitability, tangibility, liquidity, non-debt tax shield, and interest coverage ratio are major determinants of CS choice of selected companies. In addition to this, study also validate the applicability of CS theories in Indian set up and concludes that power &amp; energy companies follow the propositions of pecking order and trade-off theory. The findings of the paper will be useful to managers as it portrays critical factors affecting the CS and analysing their impact on financing decision. It will also enrich the existing pool of research in the area of capital structure and bridge the gap in existing research.

Pass-Through and C Corp Outputs under TCJA

Corporate finance research focuses on C corps (CCs) neglecting pass-throughs (PTs). We answer this neglect by examining PT outputs for the categories of debt choice, valuation, and leverage gain. In the process, we expand on the nongrowth PT research and supplement the recent CC research on the same outputs. Before the Tax Cuts and Jobs Act (TCJA) became effective in January 2018, PTs had an after-tax valuation advantage over CCs. Under TCJA, we demonstrate this advantage has been reverse. This suggests that, ceteris paribus, a typical PT can now find it advantageous to switch to the CC ownership form. More importantly, we show that nongrowth firm values are comparable to growth firm values unless we assume a rise in growth consistent with projections under TCJA where tax rates are lower. We demonstrate this projected growth increase is the key to make businesses more profitable. Additionally, we show PTs achieve optimal debt-to-firm value ratios (ODVs) well below those for CCs; PTs generally attain slightly higher quality credit ratings at their ODVs compared to CCs; and, PTs have lower leverage gains outputs (in the form of the maximum gain to leverage and the percentage increase in unlevered firm value) compared to CCs.