Borrowing Costs Research Articles

Municipal Net Revenue, Economic Activity, and the Cost of Borrowing

ABSTRACT We investigate the effects of state economic activity on the association of changes in the general fund (i.e., net revenue) and borrowing cost. Extant literature has established that net revenue is associated with municipal bond market metrics (e.g., true interest cost, bond yield spreads). Little is known, however, regarding the relationship between net revenue and borrowing cost when state economic activity is considered. Based on a sample of 1,970 general obligations bonds issued across 20 years by U.S. counties, we test whether the association between net revenue and borrowing cost is conditioned on state economic activity. We provide evidence that a state's economic activity moderates the association between net revenue and borrowing cost among county governments. Data Availability: All data in this article are available from public sources. JEL Classifications: G01; G12; H72.

The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment

Government bonds might provide reference entities that reduce corporate bond yields. We study China’s 2017 issuance of two U.S. dollar (USD)-denominated sovereign bonds when there were (effectively) no outstanding USD sovereigns. We find that Chinese corporate USD bonds experienced a four- to nine-basis-point decline in yield spreads, whereas corporate renminbi (RMB) bonds did not. The effect was stronger for corporate bonds with maturities similar to those of the USD sovereigns. Further consistent with the reference effect, USD-denominated corporate bonds experienced declines in bid-ask spreads and volatility; corporate bond yield spread changes became more sensitive to sovereign yield innovations; and the less-informed foreign mutual funds significantly increased their holdings of offshore USD Chinese corporate bonds. Limited evidence indicates that new corporate bond maturities shifted toward the sovereign bonds’ maturity after their issuance.This paper was accepted by Lukas Schmid, finance.Funding: B. Wang received financial support from Hong Kong Institute for Monetary Research. C. Y. Hong received financial support from the National Natural Science Foundation of China [Grant 72003125].Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2022.4499 .

Demand and supply constraints of credit in smallholder farming: Evidence from Ethiopia and Tanzania

Credit constraint is often considered as one of the key barriers to the adoption of modern agricultural technologies and low agricultural productivity in low- and middle-income countries. Past research and much of the policy discourse associate agricultural credit constraints with supply-side factors, such as limited access to credit sources or high costs of borrowing. However, demand-side factors, such as risk-aversion and financial illiteracy among borrowers could also affect credit-rationing of smallholder agricultural households. This study investigates the nature of credit constraints, factors affecting credit constraint status, and the effects of credit constraints on adoption and intensity of use of three modern agricultural technologies – small-scale irrigation, chemical fertilizer, and improved seeds. The paper also assesses whether credit constraints are gender-differentiated. Primary survey data were collected from sample farmers in Ethiopia and Tanzania, and Tobit and two-step hurdle econometric models were used to analyze these data. Results show that demand-side credit constraints are as important as supply-side factors in conditioning smallholders’ access to credit in both countries. We also find that credit is a binding constraint for the decision to adopt technologies and input use intensity in Tanzania but not statistically significant in Ethiopia. Results suggest that women are more likely to be credit constrained (from both the supply and demand sides) than men in both study countries. Based on these findings, we suggest that policies should focus on addressing both supply- and demand-side credit constraints to credit access, including through targeted interventions to reduce risk, such as crop insurance, and to strengthen the gender sensitivity of credit policies.

Nonprofit Capital Structure and Financial Determinants of Nonprofit Debt Instruments

Nonprofits that want to finance infrastructure need to design a capital structure - the mix of accumulated funds and external debt - that can raise enough capital while minimizing borrowing costs. Many scholars test two competing capital structure theories - the pecking order and static trade-off theories - in the nonprofit context by examining the determinants of leverage but cannot find results that conclusively support either theory. The inconsistent results raise the question of whether the applicability of two theories vary by debt instruments, due to the varying issuance costs, and default risks associated with debt instruments To answer these questions, I investigate the financial determinants of the use of debt instruments by nonprofits using IRS 990 form data on public charities from 2010 to 2016 and two-step Heckman selection models. I find the pecking order theory can explain the use of tax-exempt bonds better, while the static trade-off theory can interpret the use of mortgages better. When nonprofits have diversified revenue streams, and rely on a predictable source of revenue, nonprofits increase the use of mortgages but reduce the use of tax-exempt bonds. This paper makes theoretical contributions by delineating the applicability of pecking order and static trade-off theories. Keywords: nonprofits, capital structure, mortgages, tax-exempt bonds

Banking Market Structure and Firm Productivity: Evidence from Indonesia

This paper empirically examines the impact of banking market structure on the productivity of small and medium enterprises. Arguably, the more competitive the banking industry, the more access to finance and the lower cost of borrowing. Eventually, it could lead to better performance of small and medium enterprises. We combine two different datasets which are dataset on small and medium enterprises and the dataset on banking. Finally, we end up with more than 91,000 firm-year observations. Our empirical results show that banking competition has significant effect on the performance of small and medium enterprises. More particular, we find that the less banking competition, the lower the performance of small and medium enterprises.
 Keywords: banking market structure, firm productivity, small and medium enterprises, Indonesia

Emerging market responses to external shocks: A cross-country analysis

The size of emerging markets, as well as their economic and financial interconnectedness is increasing over time, making it important to understand their interdependencies with other economies. We develop and apply a new methodology to analyse international macroeconomic and financial shock transmission from 1978 to 2016 for 14 economies, focusing on the heterogeneity of emerging market responses across countries and over time. We find substantial time variation in the effects of these shocks with GDP, investment and consumption becoming more sensitive to global financial conditions over time. The higher perceived risk of emerging markets when global financial conditions deteriorate is reflected on their asset prices and their borrowing costs. However, a US policy rate shock does not have the expected contractionary effect, as this is partially taken over by the global financial risk shock we included. Our findings vary across countries and we attribute this to differences in country characteristics.

Effect of Interest Rates on Economic Growth in Bangladesh

The interest rate is the amount of interest paid by a borrower to a lender and is set by the central bank of a certain country. Interest rate is regarded as a key variable affecting savings and investment. The interest rate which is set by the central bank is called the base rate. The base rate affects the aggregate output. Thus, the study examined the effect of interest rates on economic growth in Bangladesh. The study did a literature review to have an overview of what others found regarding the effect of interest rates on economic growth. Based on the findings of the study, it was revealed that interest rates affect economic growth. The reduction of interest rates increases economic growth. If the interest rate is good, it keeps output growth high. The study discovered that low rates of interest help the economy grow since people can get more money to make purchases and invests in businesses, thus spurring economic growth. Access to loans from financial institutions depends on interest rates. A country cannot grow if the cost of borrowing is very high and this is significantly influenced by the interest rates. The study also noted that when the base rate increase, the interest rates from the financial institution also increases. Hence, interest rates affect the economic growth in Bangladesh. High rates tend to reduce the pace of economic development. The research concluded that interest rates should be made at a reasonable rate to spur economic growth. The study recommended that the central bank in Bangladesh, Bangladesh Bank, should develop policies and frameworks that will ensure the interest rates are key as low as possible. The government needs to embrace policies that will aid Bangladesh control interest rates and raise money circulation in the economy. Keywords: Interest Rates, Economic Growth, Bangladesh

When it matters to keep promises: Funding of retiree benefit and government borrowing cost

While funding of retiree benefits has become a critical challenge to the fiscal sustainability of U.S. local governments, little is known about the consequences of public expenditures on OPEBs and pensions. This study examines whether and when annual contributions to other post-employment benefits (OPEBs) plans affect government borrowing costs. By reducing unfunded liabilities, OPEB contributions may decrease borrowing costs. As two parts of deferred employee compensation, expenditure tradeoffs may exist between OPEBs and pension contributions. Fiscal capacity can further moderate these expenditure tradeoffs. Results show that, as U.S. city and county governments make more contributions to OPEB plans, they pay lower borrowing costs when the pension contribution is low and when fiscal capacity is low. They pay higher borrowing costs when the pension contribution is high and when fiscal capacity is low. These findings suggest that the savings of borrowing costs from OPEB contributions depend on the tradeoffs between OPEB and pension expenditures and the availability of fiscal resources.

Testing Effects of the Treasury single account system on the cost of borrowing in the OECD Countries

Testing Effects of the Treasury single account system on the cost of borrowing in the OECD Countries

The Need for Reform of Financial Markets in Times of Crisis in Emerging Economies: The Case of Lebanon

While many countries were confronting immense financial crises, Lebanon was one of the few countries that were able to withstand the dramatic consequences of the crises despite suffering from decades of geopolitical and financial instability. However, the burdened capital structure of Lebanon was overstrained by the incrementing cost of borrowing. The actual beneficiary from the latter financial model was the domestic banking sector. This sponsored the process of attracting customer deposits to be reinvested in the government debt issued by different Lebanese governments for securing the funds needed in financing the process of the development and reconstruction following decades of continuous war and destruction. The Lebanese financial system was abridged by redirecting the investors in the financial sector towards placing their capitals in customer deposit schemes with the domestic banks rather than channeling the capitals towards other economic sectors. In fact, the incentive for the investors was designated in the high yields secured by the reinvestment opportunity in the government debt that has been rising every day to reach historic records while the incentive for the domestic banks remained the conventional scheme of premiums charged for intermediation between the lender and the borrower. The latter process led to increase the concentration risk of customer deposits as liabilities on the balance sheets of the local banks. This research study aims at demonstrating the feasibility of the implementation of a scientific reform by interpreting the recognition of modern investment alternatives for the investors in the Lebanese financial sector while securing the same funding level for the Lebanese government and governing the roles of the sponsoring banks. The study will adopt referenced fundamental and technical interpretation and arguments to emphasize the necessity of launching a new era of investment derived from stimulating the domestic financial market by activating and incentivizing the role of country’s stock exchange.

Impact of capital structure on performance of microfinance institutions

Microfinance institutions play a crucial role in poverty alleviation and provide financial services to low-income households. Microfinance growth rate is quite high in Asia but an undesirable development is achieved due to high borrowing cost and inadequate reserves. For microfinance institutions, there is a need to determine a suitable mix of financing to stay sustainable. This study examines the impact of capital structure on the performance of microfinance institutions in Asia. Using a unique unbalanced panel data set of 253 microfinance institutions from 2000 to 2015, performance is measured in terms of sustainability, financial performance, social performance and efficiency. It is evident from the findings that capital structure and microfinance characteristics play a significant role in the performance. Grants to assets increase operational self-sufficiency and debt to equity increases the financial self-sufficiency of microfinance institutions. Microfinance characteristics like borrowers, loan intensity, and size of institutions upsurge sustainability. Banks and NGOs positively affect the financial and social performance of microfinance institutions. Deposit to asset ratio, debt to assets, and debt to equity impact outreach and return on the asset while grants decrease financial self-sufficiency and return on equity. At macroeconomic level, gross domestic product contributes to sustainability and management efficiency. However, inflation declines financial performance. Implications emerge from the findings are a crucial element in the performance of financial institutions. Microfinance institutions should maintain an optimal capital to ensure that their going concern is assured a all times. Therefore, managers should appropriately justify capital structure to stay sustainable.

Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds

AbstractWe study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder’s ability to extract information rents and is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9–10$\%$. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behaviour determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyse a recent non-tax regulation that affects entry into municipal bond auctions.

The global financial cycle and external debt: effects on growth and distribution in emerging and developing economies

The global financial cycle (GFCy), driven by international monetary conditions and global risk perceptions, is a major driver of capital flows to and out of emerging and developing economies (EDEs), reflected in external indebtedness. This paper analyzes the impact of the GFCy on the economic performance of EDEs borrowing in international markets. Rising external borrowing generates appreciating pressures on the exchange rate and lowers the cost of external borrowing. The overall impact of these reinforcing effects acts over investment, debt servicing and the current account balance. We conduct simulation exercises which show that rising external debt coupled with lax external financial conditions have a detrimental impact on economic activity and creates inflationary pressures through the effect of financial costs and the reaction of nominal wage demands. We show that capital control measures increase the degrees of freedom of monetary authorities.

A dynamic model of fiscal decentralization and public debt accumulation

This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central government makes transfers to local governments to offset vertical and horizontal fiscal imbalances. But the anticipation of transfers lowers local governments’ expected cost of borrowing and leads to overborrowing ex ante. Absent commitment, the central government over-transfers to reduce local governments’ future need to borrow, and in the equilibrium both local and central debts are inefficiently high. Consistent with empirical evidence, when fiscal decentralization widens vertical fiscal imbalances, local governments become more reliant on transfers, and both local and central debts rise. Applied to Spain, the model explains 39 percent of the rise in total government debt when the vertical fiscal imbalances widened during 1988–1996, and 18 percent of the fall in debt when the imbalances narrowed during 1996–2006.

International financial integration, the level of development, and income inequality: Some empirical evidence

The period 1970–2015 has seen significant increases in both income inequality and financial globalization. We examine this relationship empirically, focusing on both the Gini coefficient, and the incomes of quintiles as we move up the income scale. In doing so, we take account of both the country's level of development, and the contemporaneous globalization in trade. Overall, our results support the finding that financial globalization tends to increase income inequality. They also suggest that reducing the costs of foreign investment have a bigger impact on inequality than do reducing borrowing costs. Our findings are less definitive with respect to the impact of trade liberalization on income inequality, though the results using the quintile data are supportive of the view that trade liberalization reduces income inequality. Finally, our results provide compelling evidence for the notion that the level of development has a strong nonlinear impact on income inequality, one that is consistent with the “inverted Kuznets curve,” as characterizing the more recent experience.

The Green Corporate Bond Issuance Premium

We study a global panel of green and conventional bonds to assess the borrowing cost advantage at issuance for green bond issuers. We find that, on average, green bonds have a yield spread that is 8 basis points lower relative to conventional bonds. This borrowing cost advantage, or greenium, emerges as of 2019 and coincides with the growth of the sustainable asset management industry following EU regulation. Within this context, we find that the greenium is linked to two proxies of demand pressure, bond oversubscription and bond index inclusion. Moreover, while green bond governance appears to matter for the greenium, the credibility of the underlying projects does not have a significant impact. Instead, the greenium is unevenly distributed to large, investment-grade issuers, primarily within the banking sector and developed economies. These findings have implications for the role of green bonds in incentivizing meaningful green investments throughout the global economy.

Prime money market funds regulation, global liquidity, and the crude oil market

This paper explores how the 2016 US Prime Money Market Funds (PMMFs) regulation affected the crude oil market. This reform led to an increase in short-term dollar borrowing costs and the oil sector became particularly susceptible to disruptions in the global funding market due to a post-financial crisis debt expansion which far outpaced other commodity industries. Building on the global crude oil market SVAR model pioneered by Kilian and Murphy (2014), we find that tighter PMMFs funding conditions have a lagged negative effect on the real price of crude oil and a lagged positive effect on oil production. We show that these responses are driven primarily by a fall in certificates of deposits issued by global banks. Lastly, we evidence that the US nominal effective exchange rate acts as a transmission channel for the negative funding shock to the real price of oil.

The Relationship Between BIST100 Index Return and the Central Bank of the Republic of Turkey Interest Rate Decisions

Stock prices are affected by many economic and political factors. Interest rate, one of the macroeconomic indicators, is one of the important factors that are thought to affect share prices in the stock market. Central banks determine the interest rates of short-term loans given to banks and borrowing from banks. Through this interest rate, it aims to affect the general level of prices. A change in the interest rate changes the cost of borrowing and thus affects the firms’s profitability and ability to pay dividends. Again, change in interest rate can affect the opportunity cost of equity investments and this in turn affects stock prices. In this study, it is aimed to determine whether the interest rate decisions taken by the CBRT Monetary Policy Committee cause abnormal returns on stock prices. In Borsa Istanbul, the existence of abnormal returns with the effect of interest rate changes was investigated by event study method. Using 131-month data between May 2010 and March 2021, the presence of abnormal returns around the date of 30 meetings, when the decision to change the interest rate, was tested on the BIST100 index. As a result, it has been determined that interest rate change decisions have a very low effect on the BIST100 index. Although the effect on the index was observed within five days after the date of the interest rate increase/decrease decision, it was observed that this effect remained very weak.

Reflection of Borrowed Funds in Russian and Foreign Practice

The rationale of the study is the fact that in the market economy there are situations when an organization in the course of its economic activity lacks its own resources. This problem is especially relevant in the field of small business. The study is concerned with the economic essence, classification and features of the reflection in the accounting and tax accounting of Russia and other countries of interest and other expenses on borrowed funds. This article discussed several approaches to defining the concept of loan and loan expenses in regulatory sources of the Russian Federation and in International Financial Reporting Standards. The Accounting Regulation 15/2008 «Accounting for loans and borrowings» means the payment of interest and additional expenses on loans and borrowings under loans and borrowings. At its core, this definition describes the classification but does not clarify the concept of «loan and borrowing costs». The study provided the detailed definition of costs used in the Federal Standard of Public Finance «Borrowing Costs», in which the costs of loans and borrowings are defined as expenses related to public debt, municipal debt, debts of organizations and enterprises with state participation, including accrued interest on such borrowed funds. This definition is more complete than the definition given in the Accounting Regulations. A variation of the definition for commercial organizations can be the concept of borrowing costs as a set of costs for debt obligations of a commercial organization, including interest expenses on such obligations. The study examined various methods of credit assessment and loans when accepting them for maintenance of accounting and tax records. We considered main normative documents on accounting of expenses on loans and borrowings (borrowing costs) used in Russian and foreign practices. The study developed a methodology for credit assessment. Classification of expenses on loans and borrowings has been developed. The study considered the procedure for showing and including borrowing costs in the forms of accounting financial statements. The key points of the financial stability of the organization, indicators of liquidity, solvency, independence and financial activity were analyzed.

Research on the impact of bank competition on stability—Empirical evidence from 4631 banks in US

This paper systematically analyzes the impact mechanism of bank competition on stability. We select the balanced panel data of 4,631 non-failure banks from 2002 to 2017 released by FDIC to do the estimation and then make an appraisal on bank competition with Lerner index and two kinds of Z-score to measure bank stability respectively. The 2SLS with fixed effect is applied for estimation. Our results suggest that: (1) Competition is a living environment for all industries and bank competition mainly affects stability through franchise value, the cost of borrowing and operating behavior. (2)According to the overall regression, we find that there is an inverted U-shaped relationship between bank competition and stability with an inflection point where the Lerner index is about 0.35. Generally, the US banking industry has always been in a state of excessive competition during the observed period. The further analysis of 3 stages indicates that excessive bank competition, an ‘invisible hand’, may be one of the most important factors triggering the financial crisis. (3) According to the regression on regions, the inverted U-shaped relationship between bank competition and stability is also existing and the inflection point of Lerner index is between 0.3 and 0.37. However, there is also some regional heterogeneity in terms of the degree of competition, the level of stability and the ability to resist risks and maintain stability when facing competition. This paper may help financial regulators and commercial banks formulate differentiate regulatory policies and business strategies so that banks can control risks better and enhance stability in different competitive environments.