Debt Holders Research Articles

How Do Sovereign Credit Ratings Help to Financially Develop Low-Developed Countries?

The paper investigates the importance of having a sovereign credit rating for a country’s financial development. After controlling for endogeneity and selection bias, the authors compare different aspects of the financial sector and the capital markets of recently rated countries with otherwise similar, but unrated countries. The findings indicate that obtaining a sovereign credit rating changes the composition of the assets of domestic banks and leads to a growth in bank assets. With a sovereign rating, the government is less dependent on bank financing and it can tap international bond markets. Banks subsequently provide more credit to the private sector, which translates into riskier debt holdings, resulting in an increase in the banks’ risk-weighted assets. In addition, an initial sovereign credit rating attracts foreign investors, both FDI and portfolio investments. Hence, the authors conclude that a sovereign credit provision plays a crucial role in enabling the financial development in a country.

Tax avoidance and cost of debt: evidence from a natural experiment in China

AbstractThis study examines the impact of tax avoidance on the cost of debt using a natural experiment in China. Existing literatures identify two channels about how debt holders perceive tax avoidance behaviour. But there is no census on why and when one channel prevails or dominates the other one. Using China's New Regulation on bonds issuance in 2015 as a natural experiment, we find a negative (positive) association exists between tax avoidance and the cost of debt before (after) the New Regulation. We also find that both going public and state ownership have significant impacts on the tax avoidance and cost of debt relationship. Our findings suggest that debt holders’ perception on tax avoidance behaviour varies with external corporate governance regulations.

A stochastic model with interacting managerial operating options and debt rescheduling

We develop a stochastic continuous time trade-off model with optimal capital structure that incorporates management's selection of optimal investment timing and switching between full-scale operations, reorganization and rescheduling and termination of operations (liquidation). We show that the presence of a firm's option for debt rescheduling reduces firm value by reducing the management's ability to raise debt. This negative impact on debt capacity is reduced in the presence of higher switching costs incurred by shareholders when seeking bankruptcy protection and debt rescheduling. Larger anticipated debt reduction in rescheduling results in the management (acting in the shareholders’ interests) delaying returning to active full-scale operations which results in larger debt risk and credit spreads. On the positive side, more significant anticipated debt reduction in rescheduling results in reduced agency costs between shareholders and debt holders.

Updating the Racial Wealth Gap

Using newly available data from the Survey of Consumer Finances, this paper updates and extends the literature exploring the racial wealth gap. We examine several hypotheses proposed by previous researchers, including the importance of inherited wealth and other family support and that of trends in local real estate markets, and also extend the literature by exploring the gap across the distribution of wealth and simultaneously considering white, African American and Hispanic households. The findings indicate that observable factors account for all of wealth gap between white and Hispanic households and most of the gap between white and black families – more than in most previous research – but a substantial unexplained portion remains. Wealth differences between black and white families are completely due to different asset holdings, while wealth differences between black and Hispanic families are mostly a result of different debt holdings. Home ownership and educational attainment are the single largest observable factors that account for the racial wealth gaps, with income and financial assistance from family members playing important roles as well. The unexplained portion of the wealth gap between white and non-white families is greater at the top of the wealth distribution.

Asset Structure Impact on Capital Structure of Capital Market-Listed Firms in Indonesia and Malaysia

The debt was able to be used by the firm as a source of funds for investment-related activities, especially when the amount of retained earnings was not sufficient to cover the amount of investment needed. Naturally, the use of debt definitely caused the agency conflict between firm shareholders and debt holders. To reduce this conflict, the existence of fixed assets as collateral was needed when the firm decided to borrow money from debt holders. The purpose of this study was to prove the agency theory perspective by testing an impact of asset structure on the capital structure of firms. The population of this study was the firms listed on the Indonesia Stock Exchange and Malaysian Stock Exchange. The firms as a sample were taken from the population by conducting a stratified random sampling method. The pooled data regression model was used as the data analysis method. This result of this study showed that asset structure had a positive impact on the capital structure. It meant the causal relationship between asset structure and capital structure happened and was supported by the agency theory perspective. DOI : https://doi.org/10.26905/jkdp.v21i3.1312

Systemic Risk and Vulnerabilities of Bank Networks

Stability of the banking system and macro-prudential regulation are essential for healthy economic growth. In this paper we study the European bank network and its vulnerability to stressing differ- ent bank assets. The importance of macro-prudential policy is emphasized by the inherent vulnerability of the financial system, high level of leverage, interconnectivity of system’s entities, similar risk exposure of financial institutions, and susceptibility for systemic crisis propagation through the system. Current stress tests conducted by the European Banking Authority do not take in consideration the connectivity of the banks and the potential of one bank vulnerability spilling over to the rest of the system. We create a bipartite network with bank nodes on one hand and asset nodes on the other with weighted links between the two layers based on the level of different countries’ sovereign debt holdings by each bank. We propose a model for systemic risk propagation based on common bank exposures to specific asset classes. We introduce the similarity in asset distribution among the banks as a measure of bank closeness. We link the closeness of asset distributions to the likelihood that banks will experience a similar level and type of distress in a given adverse scenario. We analyze the dynamics of tier 1 capital ratio after stressing the bank network and find that while the system is able to withstand shocks for a wide range of parameters, we identify a critical threshold for asset risk beyond which the system transitions from stable to unstable.

Executive compensation and corporate financing policies: Evidence from CEO inside debt

We examine the relation between chief executive officer (CEO) inside debt holdings and the firm's choice between debt and equity financing when it accesses external capital markets. We find positive relations between CEO inside debt holdings and both the firm's likelihood to issue debt and the proportion of debt of their total external financing. Additional analysis indicates that CEO inside debt is negatively related to the cost of debt and positively related to the stock price reaction around the public debt issue announcement. Our results are consistent with the argument that inside debt aligns managers' and debtholders' interests leading to favorable debt terms that motivate firms to raise debt to meet their capital needs.

Impact of interest rate surprises on Islamic and conventional stocks and bonds

This paper studies the impact of interest rate news surprises on Islamic and conventional stock and bond indices, using a dataset which covers interest rate announcements and forecasts, as well as stock and bond indices in three Islamic and eight non-Islamic countris. We find that interest rate surprises tend to have a smaller impact on the returns and volatility of Islamic than conventional bonds because Islamic bonds are structured to avoid explicit interest rates. However, interest rate surprises have about the same or bigger impact on the returns and volatility of Islamic relative to conventional stocks, despite the low amounts of cash and debt holdings of firms comprising Islamic stock indices.

Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options

We measure a manager’s risk-taking incentives as the total sensitivity of the manager’s debt, stock, and option holdings to firm volatility. We compare this measure with the option vega and with the relative measures used by the prior literature. Vega does not capture risk-taking incentives from managers’ stock and debt holdings and does not reflect the fact that employee options are warrants. The relative measures do not incorporate the sensitivity of options to volatility. Our new measure explains risk choices better than vega and the relative measures and should be useful for future research on managers’ risk choices. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2811 . This paper was accepted by Shiva Rajgopal, accounting.

: (Debt Burden and Debt Repayment Possibility of Elderly Households: Comparison of Elderly Household Types)

Korean Abstract: 본 연구에서는 노인가구의 유형을 부부노인가구, 여성노인가구, 남성노인가구로 구분하여, 부채보유 여부와 부채보유액이 유의한 차이가 있는지 검증하고, 유형별 노인가구를 대상으로 부채보유 여부에 따른 가계 특성을 비교하였다. 또한 부채를 보유한 노인가구를 대상으로 가구유형별 가계 특성을 비교하였고, 부채부담지표와 부채상환가능성을 비교하였다. 2014년 노인실태조사 원자료를 사용하였고, 동거 가구원이 없는 노인가구 6,340가구의 자료를 분석에 사용하였다. 본 연구의 주요 결과는 다음과 같다. 첫째, 부부노인가구의 33.7%, 남성노인가구의 24.1%, 여성노인가구의 16.8%가 부채를 보유하고 있었으며, 부채보유액 평균은 각각 8,616만원, 5,829만원, 4,184만원이었다. 둘째, 부채보유가구는 부채미보유가구 보다 평균연령이 낮고, 교육수준은 높았다. 부채보유가구는 부채미보유가구 보다 연간소득, 연간소비지출, 총자산, 부동산자산이 유의하게 많았다. 여성노인가구와 남성노인가구의 경우, 부채보유가구의 소득 대비 소비지출의 비중이 부채미보유가구 보다 높아, 부채상환의 여력이 부족함을 보여주었다. 모든 유형의 부채보유가구에서 총자산 대비 부동산자산의 비중이 90%에 이르러, 유동성이 취약한 구조를 나타냈다. 셋째, 부부노인가구의 79.1%가 총자산 대비 총부채의 준거기준을 총족한 반면, 남성노인가구는 57.1%만이 충족하는 것으로 나타났다. 넷째, 현재의 근로․사업소득, 연금소득, 사적, 공적이전소득을 유지한다고 가정할 때, 부부노인가구의 65.3%, 여성노인가구의 63.3%, 남성노인가구의 70.5%가 총자산을 처분하여 부채상환이 가능한 것으로 나타났다. 근로․사업소득이 중단되는 경우를 가정하면, 부부노인가구의 44.9%, 여성노인가구의 53.3%, 남성노인가구의 55.2%가 부채상환이 가능한 것으로 나타났다. English Abstract: This study compared the percentage of debt holdings and the amount of debt by elderly household types - elderly couple household, female-elderly household, and male- elderly household, and compared socioeconomic, financial characteristics, and the level of life satisfaction between debt holding households and the others. Also, this study analyzed debt burden index (total asset to total debt ratio, financial asset to total debt ratio), and the possibility of debt repayment. Using the 2014 Survey of the Elderly, data from 6,340 elderly households were analyzed. The findings are as follows. About 33.7% of elderly couple households, 24.1% of male-elderly households, and 16.8% of female-elderly households had debt, and average amount of debt was 86.2million won, 58.3million won and 41.8 million won, respectively. Elderly householders who had debt were older, highly educated than those who did not, and had significantly higher income, consumption expenditure, total assets and real estates than the others. For all types of elderly households, the proportion of real estate in total assets reached 90%. About 79.1% of elderly couple households met the guideline of total asset to total debt ratio, while 57.1% of male-elderly households did. Assuming that the current labor and business income, pension income, private and public transfer income were maintained, it would be possible to repay the debt by disposing of their total assets for 65.3% of elderly couple households, 63.3% of female-elderly households, and 70.5% of male-elderly households. If they lost their labor and business income, 44.9% of the elderly couple households, 53.3% of female-elderly households and 55.2% of male-elderly households could repay the debt.

The relationship between equity and bond returns: An empirical investigation

The correlation between equity and corporate debt is ambiguous. News affecting the value of a firm's assets induces a positive correlation, whereas an increase in the volatility of a firm's assets induces a negative correlation. We examine the conditional correlation between these two securities. While the average correlation is positive, the conditional correlation increases with credit risk, and decreases with equity volatility. Our results are consistent with the thesis that the equity bond relation is dependent on the potential wealth transfer between stock and debt holders. Nevertheless, this relation seems to break down during periods of extreme market uncertainty.

Determining commercially viable two-way and one-way ‘Contract-for-Difference’ strike prices and revenue receipts

In this article, we investigate the role that a Contract-for-Difference (CFD) might play in increasing investment in renewable energy in Australia. Two CFD schemes are investigated: two-way and one-way CFD. A financial model is developed that determines commercially viable CFD strike prices. Account is taken of revenue from wholesale electricity market and renewable energy certificate sales. Capital and operational costs of the project including distribution of funds to holders of equity and debt are also included. Findings based on analysis of the solar array located at the University of Queensland Gatton Campus in Australia is presented, employing a typical meteorological year framework. The major finding was that Government will prefer a two-way CFD scheme and Single-Axis tracking solar PV array technology. In contrast, project proponents will strongly prefer a one-way CFD design.

The Interrelationships between REIT Capital Structure and Investment

We explore the interdependence of investment and financing choices in US listed Real Estate Investment Trusts (REITs) in the period 1973–2011. We find that the investment and financing choices of REITs are interdependent, but they are not made simultaneously. Our results suggest that investment determines leverage, but leverage has no apparent effect on investment decisions. Conversely, the debt‐overhang conflict between shareholders and debt holders that theoretically drives the reverse influence of leverage on investment policy does not appear to filter through to the actual investment choices of REITs. Rather, we find that REIT managers utilize the maturity dimension of capital structure to mitigate potential investment distortions and ensure that investment remains on its value‐maximizing path. We also present novel evidence on the role of investments in driving a wedge between REIT target leverage and actual leverage levels, and on the interplay between investments and leverage adjustments toward the target ratio in explaining REIT capital structure dynamics.

CEO Inside Debt and Risk Taking: Evidence From Property–Liability Insurance Firms

AbstractWe examine the incentive effects of CEO inside debt holdings (pensions and deferred compensation) on risk taking using the sample of U.S. publicly traded property–liability insurers. To represent managerial risk taking, we employ value at risk (VaR) and expected shortfall (ES), which capture extreme movements in the lower tail of insurer stock return distribution. We also estimate firm default risk, equity volatilities, and insurance‐related risk as alternative measures of risk taking. We document that inside debt represents a significant component of CEOs’ compensation in the insurance industry. We find that there is a significant and negative relationship between CEO inside debt holdings and risk‐taking behavior. The results suggest that the structure of executive debt‐like compensation could be a potential method of reducing managers’ risk‐taking incentives.

An Empirical Research on Beximco Knitting Ltd: Ratio, DuPont, Valuation and Pro-Forma Analysis

Beximco Knitting Ltd belongs to the Textile Industry. This paper examines some ratio analysis that showed the overall internal liquidity position of the company, that is not satisfactory; because of the entire ratio performance is not good, operating efficiency ratio is not good, indicates that lower efficiency generate capacity in terms of sale, debt-equity ratio is increasing overtime in order to employ the more debt financing as long-term borrowing compare to the equity financing, which make the firm more risky. Beximco Knitting Ltd is more sensitive to leverage compare to net profit margin and Asset turnover Discounted Cash Flow Analysis Model is using for valuation of the Beximco Knitting Ltd‘s prospective analysis. Forecasting the cash flow we have to use 2016-2017 as the base year of foresting cash flow for 2018-2020.The terminal growth rate of free cash flow is 2% and the present value of free cash flow is arrived using the 'Exit Multiple' model.Free cash flow to equity is discounted 10.77% to arrive at an estimated present value of free cash flows available to equity (debt and equity holders as a group), which is also known as Enterprise Value. Equity value per share (142.07) on the other hand, the market price of Beximco Knitting is 47.5tk per share, which indicates the share price is undervalued. Under pro-forma analysis we find out that all items of the financial statement is improving based on the assumption, but as investor‘s perspective we think investing in that company is not beneficial over the long run.Because the company can‘t earn positive return until 2020. Findings of the artcle are to really negative signs in accordance the investor‘s perspective, because its earnings per share are not attractive as much to invest.

Pecking order and market timing theory in emerging markets: The case of Egyptian firms

Using a unique dataset of 1270 Egyptian listed firm-year observations over 2003–2014, we investigate whether the basic premises according to the pecking order or market timing theories provide an explanation for the capital structure mix of Egyptian firms. Current work has provided mixed evidence in regard to these capital structure theories in the Egyptian context. Our results show that the most profitable firms are less likely to resort to external financing. However, in case where financial deficits exist then equity issued appears to track the deficit rather than debt. Moreover, issuances appear to track deficit periods instead of market timing attempts. Results obtained support notion that the typical Egyptian firm follows revised pecking order theory, with the importance of the four conventional determinants, profitability, tangibility, size effect and growth opportunity in debt holdings.

ROBUSTNESS OF THE BANK RESOLUTION FRAMEWORK IN THE EUROPEAN UNION

The purpose of this article is to identify the key elements of resolution framework under the Single Resolution Mechanism (SRM) and to assess the robustness of the bank resolution framework in the European Union (EU). The 2007–2009 global financial crisis exposed number of weaknesses in the banking sector. It also showed the unpreparedness of the European governments in dealing with failing banks and the possible negative consequences it can have on the wider economy. As result, in order to save the economy from even deeper crisis, governments in many European countries had no other choice than to bail-out the “too-big-to-fail” banks using taxpayers’ money. Post-crisis, banking regulators recognised the need for a broader reform and creation of a formalized resolution framework which would allow for efficient resolution of troubled banks with no or limited use of public funds. The resolution proceedings are complex procedures, which need to balance the interest of the different bank stakeholders such as: shareholders, debt holders, regulatory and supervisory authorities, governments and many others. In the EU, the SRM was put in place together with Bank Recovery and Resolution Directive (BRRD) to address the issues identified during the crisis. This article is an attempt to demonstrate that the new European resolution framework contains provisions and tools that may limit the use of public funds in resolution of failing banks. The outcome provides a framework for further research focused on better understanding of the trade-offs in resolution framework and measuring the efficiency of bank resolution in the EU.

CEO inside debt and bank loan syndicate structure

This paper investigates the effects of a borrowing firm's CEO inside debt holdings on the structure of the firm's syndicated loans. When a borrowing firm's CEO has a higher level of inside debt holdings, syndicate loans have a larger number of lenders and are less concentrated, and lead arrangers will retain a smaller portion of loans. In addition, CEO inside debt holdings have a lesser effect on the syndicate structure when lead arrangers have a prior lending relationship with the borrowing firm or the CEOs are close to retirement, while CEO inside debt holdings have greater influence on the syndicate structure when the borrowing firm has low information transparency.

Preferences of Creditors Towards Formal Bankruptcy Or Restructuring In the Course of Bankruptcy (The Case of “Transaero” Company)

This article is a case study of the bankruptcy of the Russian carrier company “Transaero” that took place in 2015 aimed to reveal the preferences of creditors of financially distressed companies between formal bankruptcy and restructuring. We suggest that the creditors of “Transaero” have chosen its bankruptcy because its liquidation value was significantly higher than its going concern value. Using data on plane sales we estimated statistically the market value of airplanes by plane type depending on their age. It gave us the better estimate of the value of Transaero’s fleet. According to our estimate the liquidation of the company will lead to the 75 % debt recovery for its debt holders. Then we modelled the hypothetic restructuring that included asset sales and return of a number of planes in financial lease to the leasing companies, and in total we got rid of 35 planes. This restricting could bring the debt down by 22 % but under no future cash flow scenario the company would be able to serve its debt. The enterprise value of “Transaero” as a going concern is less than its liquidation value hence the value of its equity is negative. The future cash flow to the firm is less than annuity payments needed to serve and to pay out debt. In case of restructuring the creditors’ losses would have been in the range of 60 % to 78 %. Thus, we concluded that the choice of the creditors was rational.

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.