Debt Adjustment Research Articles

Timanco S.A.: Unpaid Taxes, Losses Carried Forward, Foreign Debt, Presumptive Income and Adjustment for Inflation: Matching DCF and EVA©

There are methods to match value added approaches (Residual Income Method, RIM and Economic Value Added, EVA) with discounted cash flow methods, DCF. In this note we use a real life case from an emerging country to illustrate the matching, with complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the Financial Statements. In all methods we use market values to calculate the discount rates. We stress what have been said before: for a single period, RI or EVA does not measure value. Hence we include cash flow expectations and market values in the calculation of discount rates and values.

Corporate debt and financial balance sheet adjustment: a comparison of the United States, the United Kingdom, France and Germany

The level of UK corporate debt directly affects financial stability in the United Kingdom because a significant amount of the exposure of the UK financial system is to UK corporates. Our paper provides a comparison of the determinants of corporate debt in the United States, the United Kingdom, France and Germany. The comparison serves to benchmark our findings about the determinants of UK corporate debt. In addition, the UK financial sector is significantly exposed to the corporate sectors in the United States, Germany and France. The model assesses the contribution of investment, acquisitions, cash flows and market-to-book values to the determination of debt, and also the tendency of debt to revert to its optimum level. Debt was found to be positively related to the financing needs of the firm, and the optimum level of debt to be negatively related to the market-to-book ratio. This casts some light on the procyclicality of debt.

Adjusted Earnings Yields and Real Rates of Return

An accurate forecast of real return requires that accounting and debt adjustments be made to reported earnings. This article presents methodologies that investors can use to estimate the accounting and debt adjustments for individual companies and offers evidence, derived from a predictive regression model, that investors should consider these adjustments important. The article also reviews the use of nonfinancial corporate debt and makes the case that investors should view the use of debt by nonfinancial companies more positively than they currently do.

Twenty‐five years of consumer bankruptcy in continental Europe: internalizing negative externalities and humanizing justice in Denmark

AbstractThis paper explores the problems and processes that led to the birth of consumer bankruptcy in continental Europe, a process that began in Denmark in January 1972 and culminated with the adoption of the Danish consumer debt adjustment act, Gældssaneringslov, on 9 May 1984. While this law is often described in primarily humanitarian terms, in the sense of offering a respite to “hopelessly indebted” individuals, both the motivation for the law and its intended scope were not simply accretions on an already multi‐layered welfare system. Instead, the law was designed primarily as a pragmatic response to economically wasteful collections activities that imposed negative externalities on debtors, creditors, and especially Danish society and state coffers; the law was intended to force creditors to internalize (or eliminate) these externalities with respect to all debtors unable to pay their debts within a reasonable period of 5 years. The paper also examines the growing pains of this new system. The law originally left significant administrative discretion to judges, which produced vast disparities in treatment of cases in different regions of the country. Ultimately, a reform implemented in October 2005 made the system more accessible, more unitary throughout the country, and more humane. The effects of this reform are already visible in statistical observations of the system, though significant regional variations persist. Given the striking coincidence in timing, this paper also offers brief comparative comments on the parallel design—but very different effect—of the most significant reform of the US consumer bankruptcy law, also effective in October 2005. Copyright © 2009 John Wiley & Sons, Ltd.

Twenty-Five Years of Consumer Bankruptcy in Continental Europe: Internalizing Negative Externalities and Humanizing Justice in Denmark

This paper explores the problems and processes that led to the birth of consumer bankruptcy in continental Europe, a process that began in Denmark in January 1972 and culminated with the adoption of the Danish consumer debt adjustment act, Gaeldssaneringslov, on May 9, 1984. While this law is often described in primarily humanitarian terms, in the sense of offering a respite to 'hopelessly indebted' individuals, both the motivation for the law and its intended scope were not simply accretions on an already multi-layered welfare system. Instead, the law was designed primarily as a pragmatic response to economically wasteful collections activities that imposed negative externalities on debtors, creditors, and especially Danish society and state coffers; the law was intended to force creditors to internalize (or eliminate) these externalities with respect to all debtors unable to pay their debts within a reasonable period of five years. The paper also examines the growing pains of this new system. The law originally left significant administrative discretion to judges, which produced vast disparities in treatment of cases in different regions of the country. Ultimately, a reform implemented in October 2005 made the system more accessible, more unitary throughout the country, and more humane. The effects of this reform are already visible in statistical observations of the system, though significant regional variations persist. Given the striking coincidence in timing, this paper also offers brief comparative comments on the parallel design - but very different effect - of the most significant reform of U.S. consumer bankruptcy law, also effective in October 2005.

Capital structure of listed Portuguese companies

Purpose – This study aims to evaluate the impact of listed Portuguese companies' specific determinants on adjustment of actual debt towards target debt ratio. The specific determinants on adjustment of actual debt towards target debt ratio that we consider are: asset tangibility, size, profitability and market to book ratio.Design/methodology/approach – Dynamic panel estimators are used to determine adjustment of the actual level of debt towards optimal level of debt, revealing the level of transaction costs borne by companies. OLS regressions are also used, in order to estimate the impacts of companies' specific determinants on debt adjustment.Findings – The results suggest that transaction costs are relevant in listed Portuguese companies' access to debt. Tangibility of assets and size are determinants that contribute for a greater adjustment of debt towards optimal level. The results also suggest that the capital structure decisions of listed Portuguese companies can be explained in the light of trade‐...

Study on the Tax Consequences of Recapitalization and Debt Adjustment

Study on the Tax Consequences of Recapitalization and Debt Adjustment

Corporate Debt and Financial Balance Sheet Adjustment: A Comparison of the United States, the United Kingdom, France and Germany

The level of UK corporate debt directly affects financial stability in the United Kingdom because a significant amount of the exposure of the UK financial system is to UK corporates. Our paper provides a comparison of the determinants of corporate debt in the United States, the United Kingdom, France and Germany. The comparison serves to benchmark our findings about the determinants of UK corporate debt. In addition, the UK financial sector is significantly exposed to the corporate sectors in the United States, Germany and France. The model assesses the contribution of investment, acquisitions, cash flows and market-to-book values to the determination of debt, and also the tendency of debt to revert to its optimum level. Debt was found to be positively related to the financing needs of the firm, and the optimum level of debt to be negatively related to the market-to-book ratio. This casts some light on the procyclicality of debt. It suggests the growth of debt in a boom is explained by the increase in financing needs; and this more than offsets the fall in the optimum level of debt associated with the rising market-to-book value. In addition, we found that it may be expected that, in a boom, German and US debt will rise above the optimum level by more than in the United Kingdom and France - responding to the higher levels of investment and acquisitions. And in a slowdown, when adjusting back down to the optimum, German and US debt tends to be paid down more slowly.

Rural Adjustment Schemes: Juggling Politics, Welfare and Markets

The Commonwealth government has offered support to farmers in the form of structural or business adjustment‐type schemes since the Loan (Farmers Debt Adjustment) Acts of 1935–1971. Since 1971, a series of more comprehensive rural reconstruction/adjustment schemes with a range of objectives from debt alleviation to encouraging some exits from agricultural industries, has been in place. While having little direct impact on the structure of these industries, the various schemes have been politically important and an indicator of how core values relating to agricultural production and rural life have changed. A review of the schemes shows an increasing focus on improving farm productivity and sustainability, accompanied by a discourse emphasising the need to promote the ‘farm business’, rather than to protect the ‘family farm’. On the other hand, governments have also used these schemes to deliver ‘welfare’ outputs.

How does Financial Distress Affect Small Firms’ Financial Structure?

This paper provides new evidence on the financial structure of small firms by emphasizing the role played by financial distress. We specify a model of debt adjustments that allows us to investigate the specific nature of the adjustment process towards target debt levels in small firms, which is then extended to account for the effect of financial distress on financial structure decisions. Our models were estimated by the Generalized Method of Moments on a data panel of small Portuguese firms during a period of recession, in which a substantial proportion of the companies analyzed faced a financial distress situation. We find that small firms do adjust their debt ratios towards target levels, the speed of adjustment being faster in the shorter term. Our results also indicate that there are major differences in the determinants of long-term and short-term debt, highlighting the role played by debt maturity in explaining a firm’s financial structure. Finally, random behavior is observed in financially distressed firms, who seem to be disoriented when making their financial structure decisions.

Facts on the Ground and Reconciliation of Divergent Consumer Insolvency Philosophies

Traditionally, civil law jurisdictions in Scandinavia and the continent of Europe have not been willing to acknowledge the appropriateness of extending bankruptcy relief to consumer debtors and discharging any part of their debts. The opposition was based on the importance of upholding the sanctity of contractual obligations: pacta sunt servanda. This attitude stood in contrast to the fresh start philosophy of US bankruptcy law, which embraced a more forgiving attitude, focusing on the reintegration of the insolvent debtor into society, substantially free of debt, after he has filed for bankruptcy and surrendered his non-exempt property for distribution among his creditors. The relaxation of credit controls and the rapid increase in the number of insolvent debtors in the late 1980s and early 1990s has forced many continental jurisdictions to reconsider their traditional opposition. They have since adopted debt adjustment plans providing various forms of debt relief to overcommitted debtors but only a substantial number of years after the initial proceedings. The American reaction has gone in the opposite direction. With the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the United States has reversed its century old liberal fresh start tradition. The 2005 Act imposes a formidable means test as well as other preconditions to determine whether a debtor has sufficient discretionary income to pay off twenty percent of his or her unsecured debts under a Chapter 13 plan. If the answer is yes, the debtor is denied the right to file a bankruptcy petition under Chapter 7 of the Bankruptcy Code. This paper asks whether these developments on opposite sides of the Atlantic suggest that facts on the ground are more important than dogma and deeply entrenched beliefs. The author’s answer is that while there is certainly a trend towards convergence between continental European and US approaches to consumer insolvency, it is much too soon to speak of a common culture and a common approach. He notes, however, that Commonwealth jurisdictions (notably Australia, England and Canada) have long adopted a means test to determine a debtor’s eligibility for discharge from debt and suggests that continental scholars would have done better to study the Commonwealth experience as embodying a suitable compromise than to flirt with the US fresh start philosophy, only to reject it as too alien to the continental moral sense.

How Should the Allocation of Resources Adjust to the Baby Bust?

AbstractWe analyze the impact of a drop in fertility on the optimal allocation of resources in an overlapping generations economy where old workers care about leisure. We also characterize optimal dynamics and study the decentralization of the optimum by means of inter‐generational transfers and/or public debt. We conclude that the policy recommendations of postponing retirement is fragile and depend on preferences and technologies. Also, even when the optimal adjustment of public debt goes into the expected direction in the long run—i.e., public debt should decrease—this may not be the case during the transition.

The effect of market conditions on capital structure adjustment

The empirical implications of the trade-off theory, the market timing theory, and Welch's theory [Journal of Political Economy (in press)] of capital structure are examined using aggregate US data for 1952 to 2000. There is a long-run leverage ratio to which the system reverts. Deviations from that ratio help to predict debt adjustments, but not equity adjustments. A high market-to-book ratio is associated with subsequent debt reduction, but there is no effect in the equity market.

The Effect of Market Conditions on Capital Structure Adjustment

The empirical implications of the trade-off theory, the market timing theory, and Welch's (2003) theory of capital structure are examined using aggregate US data for 1952 to 2000. There is a long-run leverage ratio to which the system reverts. Deviations from that ratio help to predict debt adjustments, but not equity adjustments. A high market-to-book ratio is associated with subsequent debt reduction, but there is no effect in the equity market.

Timanco S.A.: Unpaid Taxes, Losses Carried Forward, Foreign Debt, Presumptive Income and Adjustment for Inflation. The Treatment with DCF and EVA(c)

Velez-Pareja and Tham (2003) presented a method to match the value added approaches (Residual Income Method, RIM and Economic Valor Added, EVA) with the discounted cash flow, DCF methods. There they used a relatively complex example, but yet, far away from reality. In this note we use a real life case from an emerging country to illustrate the same procedure, but with additional and real life complexities such as unpaid taxes, losses carried forward, foreign exchange debt, presumptive income and inflation adjustments to the financial statements. In all methods we use market values to calculate the discount rates.We stress what Velez-Pareja 1999 and Fernandez 2002 have said: for a single period, RI or EVA does not measure valor. We have to include expectations and market values in the calculation of discount rates and hence values.

Government expenditure in the two-country, open, growing economy

deterioration of public services in particular hits women harder since women are likely to be deprived of health and educational services as resources become increasingly scarce. The purpose of this study is to empirically investigate the effects of foreign debt and structural adjustment programs on the educational status of women in eight Latin American countries: Argentina, Brazil, Chile, Mexico, Peru, Uruguay, Ecuador, and Bolivia. The study employs time series analysis and covers the period between 1980 and 1996. (JEL F30)

How Useful Are Comparisons of Present Debt Problems With the 1930s?

My assignment for this Conference on the Crisis ln Finance, as I understand is, is in the first instance to bring to bear the debt experience of the Great Depression of 1929/1940. I summarize first the record as shown in a Twentieth Century Fund report, which I prepared in 1938 for the Fund's Committee on Debt Adjustment. This report already contained a good deal of hindsight, since it was written five years after the end of the recession of 1929/33. But the process of reconstruction is also relevant to present-day problems. In particular, the New Deal reforms in the debt field set the pattern of law and financial customs within which the forces of finance have been operating in recent decades. Parallels and contrasts between the debt situations of 1928/1930 and the 1988-90 are next examined. After some institutional analysis, quantitative examination of changes through time (1966/1989) is undertaken, using a set of tables [reproduced in the ANNEX] on the balance-sheet history of households and of non-financial corporations. In the light of all this experience, I make a quick excursion into the field of financial reform. It is not my business on this occasion to spell out the policy alternatives. But we must ask whether basic reform may not be needed to keep debt problems from plaguing us year after year? and also whether attempts at reform may themselves bring the crisis to a head! It turns out that the issue of reform in a crisis-context hinges on whether the United States can quickly set in motion a major to act as an economic locomotive. I claim that this is feasible? the new industry being restoration and restructuring of the U.S. infrastructure. To get it in motion calls for a revival of fiscal policy along radical lines.

Any Room For Aesthetics?

This article describes the everyday practices of consumption of heavily indebted people and discusses the links between economic resources and everyday aesthetics. It is based on interviews with people in a Finnish debt adjustment programme. Becoming overindebted has markedly changed the interviewees’ habits of consumption that are now characterized by constant and careful control of the resources and a self-understanding of never buying anything unnecessary. Becoming indebted has also affected the interviewees’ relations to the social world: on the one hand they now feel themselves inferior compared to other consumers with more resources; but on the other, some of them feel critical and superior in relation to the whole consumer culture; indebtedness has given them ‘new values’. Despite this critical stance, small pleasures and aesthetic judgements intermingle in the interviewees’ practices of shopping. Thus it becomes evident that degrees of freedom or aestheticism in consumption are not completely reducible to resources.

Debt and Devaluation

Studies of the impact of the Latin American debt crisis concur that the burden of debt and structural adjustment policies has fallen disproportionately on the poor (Dietz, 1989; Beneria and Feldman, 1992; Nash, 1992, 1994; Beneria, 1992; Feldman, 1992; Safa and Antrobus, 1992; Payer, 1985; Frieden, 1985; Dornbusch, 1986; Cardoso and Helwege, 1992a and b). There is variation among Latin American states, however, that does not simply turn on the raw quantity of debt held. The scale of the economy, its recent economic history, the politics of emerging democracies and former military governments, and each state's bargaining position with transnational agencies have implications for the relative indebtedness of a nation and the relative burden on its poor. Ecuador illustrates this point. Its oil boom and (comparatively) small amount of debt paradoxically put it at a disadvantage in debt negotiations. In fact, it fared worse in the rescheduling of its debt and repayment periods. As a consequence, Ecuador's debt assumed a higher percentage of Gross Domestic Product (GDP) than those of Brazil and Mexico, two of the largest debtors. The policies developed by two military and two democratic governments to mediate these transnational pressures exacerbated the negative impact on the popular class.

Changing Directions in Consumer Bankruptcy Law and Practice in Europe and USA

The consumer bankruptcy or, rather, consumer debt adjustment, is a fairly recent phenomenon in continental Europe. In the nineties, a number of European countries introduced judicial institutions in order to alleviate an excessive debt burden carried by consumer debtors. In addition to the court proceedings, the European jurisdictions often provide the debtor with debt counselling services, supervision, and payment requirements. In the United States, on the other hand, discharge of debt has been an established principle of bankruptcy law since the late 19th century, and bankruptcy is frequently used by consumer debtors. However, in the US, as well as in Canada, debtors are increasingly encouraged to opt for a payment plan. There seems to be a certain convergent trend between the two different legal cultures. Paradoxically, at the same time scholars have pointed out that the variance in local cultures seems to be a main factor in explanations of how debtors choose either a direct discharge or a payment plan. This finding gives us reason to consider the interplay of counselling and other pre-trial measures and its effect upon the rights and duties of debtors.