Debt Agency Research Articles

Use of Big Four auditors and fund raising: evidence from developing and emerging markets

PurposeThis study is motivated by recent research suggesting that the funding benefits of using Big Four auditors may not be as uniform as were previously assumed. The purpose of this paper is to analyze the relationship between use of Big Four auditors and access to debt capital by applying data from microfinance institutions (MFIs) in emerging countries, a population typically not investigated in accounting research.Design/methodology/approachThe authors apply a unique hand-collected data set from 60 emerging markets and empirically investigate whether access to various debt categories is related to the use of Big Four auditors.FindingsThe authors find that access to international commercial debt, international subsidized debt and government agency debt is positively related to the use of a Big Four auditor. For local commercial debt, the authors find no association between auditor type and access to debt capital. The association between auditor choice and access to debt capital is stronger for nonprofit than for-profit MFIs.Originality/valueThis is the first audit quality study to include a broad sample of emerging countries, which in itself is an important contribution. As far as general audit quality research is concerned, the authors take the literature one step further by showing that the benefits of using a Big Four auditor may be dependent on the specific source of debt financing a firm or organization seeks to use. Moreover, the authors demonstrate that the for-profit vs nonprofit dimension influences the relationship between auditor choice and access to capital.

Does the choice between fixed price and make whole call provisions reflect differential agency costs?

Bonds with either fixed price or make whole call provisions allow for the efficient recontracting of claims, but they differ in terms of their ability to mitigate debt agency costs. Controlling for the influence of bondholder-shareholder conflicts on both the level of covenant protection and selection of a particular type of call provision, we show that firms select call provisions with greater sensitivity to changes in the option-free value of the bond when agency problems are more severe. Our findings are consistent with the Barnea, Haugen and Senbet (1980) theorem that firms select fixed price callable debt to mitigate bondholder-shareholder conflicts.

Principal Payments on the Federal Reserve's Securities Holdings

As noted in the Policy Normalization Principles and Plans issued in September 2014, when the Federal Open Market Committee (FOMC) judges that it is appropriate to begin the process of normalizing the size of the balance sheet, it intends to gradually reduce the Federal Reserve's holdings of Treasury securities and agency debt and agency mortgage-backed securities (MBS). This note provides data sources for information on current SOMA holdings and offers background information to help understand how principal payments on SOMA securities combined with a change in reinvestment policy will reduce these holdings.

Impact of Quantitative Easing on Purchased Asset Yields, its Persistency and Overlap

AbstractThe main focus of this paper rests on the event study and SVAR analysis of quantitative easing that was initiated as a reaction to the financial crisis at the turn of 2008/2009 that finally ended in 2014. The Fed was virtually unable to continue with its conventional monetary policy regime in environment of zero-bound threshold, where there is no easy way to decrease main monetary policy rate any further. As a reaction to this limitation, the Fed started to practice quantitative easing and other unconventional measures. Event study examines changes in yields of purchased assets, namely US Treasuries, MBS and agency debt, and on two-day event window of the OIS and yield spreads quantifies imminent impact of QE announcements and relevant chairman speeches. Following VAR model and impulse-response functions, I examine the impact of QE and its persistency on purchased asset and on alternative asset classes in the framework of various transmission channels such as signalling, portfolio-balancing and liquidity channels. In this study I found non-negligible impact of QE on purchased assets in both models through all waves of QE and time persistency patterns in IRFs part. Furthermore, some evidence for portfolio-balancing channel and other related channels was found.

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.

경영자소유지분이 부채만기와 대리인비용에 미치는 영향

경영자소유지분이 부채만기와 대리인비용에 미치는 영향

The Effects of Agency Costs and Insiders’ Shareholdings on Financing Choices

<p><span style="font-size: medium;">This paper investigates the effects of debt agency cost and equity </span><span style="font-size: medium;">agency cost of current and prior periods on the financing choices of long-term debts, seasoned equity offering, and private equity financings. It also examines the effects of the shareholdings of insiders on the association between both debt and equity agency costs and the choice of financing methods. </span></p>The findings show that both prior and current debt agency costs are positively related to seasoned equity offerings of current period, and both prior and current debt agency costs are positively related to private equity financing of current period regardless of whether the models consider the factor of insiders’ shareholdings. As for equity agency cost, the document indicate that both current and prior equity agency costs are negatively related to current seasoned equity offerings, however, only prior equity agency costs are negatively related to current seasoned equity offerings under considering shareholdings of insiders. Moreover, the shareholdings of insiders would affect the positive association between the corporate debt agency cost and seasoned equity offerings and the positive association between the corporate equity agency cost and debt financing.

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This “collateral trade” effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening. JEL Classification: E58, G21, G28, H63

The Effect of CEO Option Compensation on the Capital Structure: A Natural Experiment

Firms simultaneously choose both their capital and their executive compensation structure. Using the Internal Revenue Code 162(m) tax law as an exogenous shock to compensation structure in a natural experiment setting, I identify firm leverage changes as a result of chief executive officer (CEO) option compensation changes. The evidence provides strong support for debt agency theory. Firms appear to decrease leverage when CEOs are paid with more options and when CEO options become a higher percentage of future cash flows. The findings are robust to controlling for corporate governance and convertible debt.

Institutional arrangements and debt financing

I find that institutional arrangements have an impact on the real economy by affecting firms’ choice between private and public debt and the subsequent financing costs. Using new debt issued by firms in 26 non-US countries, I find, after controlling for firm characteristics predicted by debt agency and information asymmetry theories, that the level of financial market development, the efficiency of bankruptcy procedure, the integrity and enforceability of laws, and the transparency of financial information have significant impacts not only on firms’ debt choice and yield to maturity in domestic debt market, but also their issuance choice in the international debt market.

Analisis dampak struktur kepemilikan pada kebijakan hutang dalam mengontrol konflik keagenan

This study examines the impact of ownership structure and some control variables on corporate debt policy (debt ratio) in an agency theory context. Control variables are dividend payment, firm size, asset structure, firm profitability and tax rate. This study is based on the previous study by Moh’d et al., (1998), which found that ownership structure of the firms’s equity (insider ownership, shareholder dispersion and institutional investor) is important in explaining corporate debt policy in a agency theory context. This study is focused on all firm listed on Jakarta Stock Exchange, except financial and insurance firms from 1992 to 1996. The method of analysis is using pooling. The method of data collection is purposive sampling. There are 100 firms year observation. The result of the study shows that insider ownership and institutional investor to be significant and negative determinant of the corporate debt policy (debt ratio). It also indicates that shareholder dispersion is insignificant determinant of debt ratio. Keywords: Debt Ratio, Ownership Structure, Agency Theory, Insider Ownership, Shareholder Dispersion and Institutional Investor.

Types of guarantees and their relation to external auditing：Evidence from the Chinese bond market

Guarantee conditions and external auditing are both key parts of debt contracts. Understanding the relationship between guarantee conditions and external auditing is crucial for the improvement of debt contract efficiency and maximization of enterprise value. With non-listed enterprises in the Chinese bond market from 2008 to 2013 as the study sample, this paper investigates the relationship between different types of guarantee and external auditing. The empirical result indicates that: a related-party guarantee is significantly positively correlated with high-quality external auditing, while a local-government guarantee (in which the guarantor and bond issuer belong to the same local government) is significantly negatively correlated with high-quality external auditing. The research also shows that high-quality external auditing is significantly negatively related to bond issuance cost only if companies use a related-party guarantee. The reason is that a local-government guarantee implies the credit and security of local government, which reduces debt agency conflict and the demand for high-quality external auditing, while a related-party guarantee does not reduce information asymmetry, but increases the credit risk of bonds. This risk can be recognized by investors in the Chinese bond market which is dominated by institutional investors, thus causing stronger demand for high-quality external auditing. The result shows that a guarantee substitutes for external auditing when the guarantee is positive, otherwise external auditing is a supplement to a guarantee.

It Takes a Regime Shift: Recent Developments in Japanese Monetary Policy through the Lens of the Great Depression

Last week, we witnessed one of the most exciting developments in monetary policymaking since the 1930s. The Japanese central bank staged an honest-to-goodness regime shift. The Bank of Japan went beyond vague promises and cheap talk. As I will describe in more detail later, it took dramatic actions and pledged convincingly to do whatever it takes to end deflation in Japan. The theoretical reasons why this regime shift may be important are well understood by economists. Persistent deflation and anemic growth suggest that Japan continues to suffer from a shortfall of demand. But their policy interest rate is already at the zero lower bound. Furthermore, riskier, long-term rates are also very low— suggesting that unconventional policies such as large-scale asset purchases are unlikely to do much to further reduce nominal rates. As discussed by Paul Krugman, Gauti Eggertsson and Michael Woodford, and others, if unconventional monetary policy can raise expected inflation, this can push down real interest rates even though nominal rates cannot fall. 1 This, in turn, can raise aggregate demand by stimulating interest

Agency Cost, Growth Options, and Debt Maturity in the Indian Corporate Sector

The debt maturity literature has established that agency cost problems, information asymmetry, and liquidity risk are important factors which determine the corporate debt maturity structure. Using panel OLS regression methodology on a panel data of 266 firms drawn from BSE 500, this research paper investigates empirically how agency cost determines debt maturity decisions in the Indian corporate sector. The agency cost hypothesis established that agency problems caused by the conflict of interest between shareholders and bondholders can be mitigated through short-term debt maturity. Therefore, debt maturity is inversely related. The research finds that the coefficient of growth options is positive and significant as against the empirical prediction that debt maturity and growth options are inversely related. However, the positive and significant coefficient on growth options reveals the severity of agency problems in the Indian corporate sector. The research findings lead to the conclusion that debt- equity conflicts over the exercising of growth options are mitigated by not issuing short-term debt. Maturity matching, long-term debt with call and sinking fund provisions, bank debt, secured debt, and debt with covenants are the corporate borrowing strategies adopted by the Indian companies to deal with agency problems, information asymmetry, and liquidity risk.

Institutions and Debt Financing

We find that institutional arrangements have an impact on the real economy by affecting firms’ choice between private and public debt and the subsequent financing costs. Using new debt issued by firms in 26 non-US countries, we find, after controlling for firm characteristics predicted by debt agency and information asymmetry theories, that the level of financial market development, the efficiency of bankruptcy procedure, the integrity and enforceability of laws, and the transparency of financial information have significant impacts not only on firms’ debt choice and yield to maturity in domestic debt market, but also their issuance choice in the international debt market.

Public Debt, Private Wealth, and Fiscal Agency

The present paper introduces the concept, and the model of fiscal agency, i.e. of a state of nature, in which the accumulation of public debt serves to increase the wealth of private sector, through leveraging private savings, and driving down real interest rates. Empirical research, conducted in a sample of 27 countries provides strong support to that concept. Fiscal agency proves that the crowding out of private savings by public debt is rather an exception, than a general rule among developed countries. It also seems to be a plausible explanation of public indebtedness in the otherwise rich social systems.

Corporate Debt Restructuring and Agency Problems: The Case of Thai Petrochemical Industry (TPI)

<i>Corporate Debt Restructuring and Agency Problems: The Case of Thai Petrochemical Industry (TPI)</i>

ABS inflows to the United States and the global financial crisis

Relative to the “global savings glut” (GSG) hypothesis, we present a more complete picture of how capital flows contributed to the financial crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. The GSG hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. Foreign acquisitions of private-label ABS, primarily by Europeans, provided credit more directly and, by adding to domestic demand for these securities, contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.

Structured Finance, Acquisitions and Debt Agency

Modern corporations use complex debt instruments and pursue acquisitions. In order to analyze the properties of some of these contracts in the event of an acquisition, this paper considers a company that has an incumbent capital structure, comprising one of five practically important structured debt contracts. An opportunity for an acquisition comes along that was not ex-ante contractible. The equity holder decides on the financing of this expansion by trading off tax advantages of debt against costs of bankruptcy. The model yields a number of insights for structured debt and acquisitions, four of which are as follows: First, a seniority clause offers the bondholder protection from agency, but it also decreases the equity holder’s incentives to finance the acquisition. Second, embedded call options are valuable even if interest rates are constant, because they allow the equity holder to issue a new bond at fair value. Third, bankruptcy remoteness is valuable, if assets are very risky. Fourth, convertible bonds are vulnerable to agency and the conversion option bears the same incentive problem as a seniority clause. These properties explains, for example, the otherwise puzzling practice of companies buying out convertible bond holders prior to an acquisition.

What Prospects for a European Debt Agency ?

Résumé Les crises grecque et irlandaise ont mis en évidence une des faiblesses de l’Union économique et monétaire, à savoir qu’il n’existe pas de mécanisme pour prévenir et traiter les crises de dette publique dans la zone euro ( ze ). Dans ce contexte, nous analysons la possibilité d’émission commune de titres de dette par les gouvernements de la zone euro, géré par une agence européenne de la dette ( aed ). L’ aed pourrait atteindre trois objectifs principaux : 1) l’amélioration de la coordination budgétaire dans la ze ; 2) le renforcement de la stabilité financière de la ze ; et 3) le financement des États membres de la ze à un coût optimal, le mandat traditionnel d’une agence de la dette nationale. Notre proposition favorise le premier objectif destiné à mettre en œuvre par un moyen efficace de supervision et de coordination les politiques budgétaire nationales. Par ailleurs, l’ aed , étant de facto un mécanisme de soutien en cas de crise, améliore également la stabilité financière de la ze . Enfin, l’émission commune permettrait d’accroître la liquidité des titres émis, ce qui diminuerait les coûts de financement des pays participants. D’un point de vue pratique, nous analysons le modèle d’une agence qui émietterait des euro-obligations et re-prêterait aux pays participants. Cette agence serait gouvernée par un conseil qui fixerait les quantités qui seront émises et/ou le prix à payer pour chaque participant en fonction de ses fondamentaux. Le conseil devrait être indépendant du pouvoir politique afin d’augmenter les prix, de réduire les quantités et même de refuser l’accès au financement pour les pays les moins vertueux en termes de finances publiques. JEL Code : H63, E62, G12