Debt Holders Research Articles

(A Study on the Loan Decision Behavior and Debt Retention Characteristics and Financial Service Demands According to the Current State of Multiple Debt of Financially Excluded Households)

Korean Abstract: 본 연구는 금융소외자의 대출결정행동과 부채보유 특성 및 금융서비스 요구사항을 살펴보고, 더 나아가 다중채무현황에 따라 대출결정행동과 부채보유 특성 및 금융서비스 요구사항이 어떠한 차이를 보이는지 파악하여 금융소외자의 금융생활 안정을 도모하고자 하였다. 이를 위해 서울복지재단에서 2014년 8월 1일부터 9월 15일까지 희망플러스통장과 꿈나래통장 가입자를 대상으로 조사한 설문조사 자료를 이용하였으며, 응답자들 중 부채를 보유하고 있는 627명(62.4%)을 최종 분석에 이용하였다. 분석대상자들 중 대출받은 이용기관이 1개인 집단은 347명(55.3%), 2개인 집단은 187명(29.8%), 3개 이상인 집단은 93명(14.8%)이었다. 주요 연구결과는 다음과 같다. 첫째, 금융소외자의 90% 이상이 금융교육을 받은 경험이 있다고 응답하였으며, 대출검색수단으로서 조사대상자의 약 1/4정도가 관공서를 통해 정보를 얻는다고 하였다. 이를 볼 때 금융소외자를 대상으로 하는 금융교육의 질적 향상을 위해 교육 및 실무 전문가들은 관공서 등과의 협력이 요구된다. 둘째, 첫 번째 이용한 금융기관이 시중은행(1금융권)인 금융소외자가 2개 이상의 금융기관에서 재대출을 한 비중은 13.8%였으나, 카드회사나 보험회사, 상호금융기관 등 제2금융권에서 1차 대출을 받은 금융소외자의 경우에는 20% 내외가 첫 번째 금융기관 이외에 2곳 이상의 금융기관에서 추가대출을 받은 것으로 나타났다. 이는 금융소외자 중 제1금융권에서 소외당하는 경우 추가 대출을 시도할 가능성이 크며 그럴 경우 계속해서 고금리가 적용되는 제2금융권에 남아있을 가능성이 크다는 점을 시사하고 있다. 셋째, 3개의 금융기관에서 대출을 받은 금융소외자의 경우 1~2개 기관에서 대출을 받은 금융소외자에 비해 PC 인터넷이나 모바일 등을 통해 정보를 탐색하는 비중이 높았고, 신속하게 대출을 받을 수 있다는 이유로 해당 금융기관을 선택한 비중도 더 높았다. 또한 고금리 채무가 총부채에서 차지하는 비중도 3개의 금융기관에서 대출을 받은 금융소외자 집단에서 상대적으로 더 높은 비중을 보였으며, 주된 대출목적은 주거목적자금이나 생활자금이었다. 넷째, 3개의 금융기관에서 대출을 받은 금융소외자는 단기연체나 채무불이행 경험 비중이 다른 금융소외자에 비해 더 많았고 채권추심경험도 더 많은 결과를 볼 때 다중채무 금융소외자가 부채상환을 잘 이행할 수 있는 방법을 강구할 필요가 있다. Korean Abstract: The purpose of this study is to examine financial decision - making behaviors and debt holdings characteristics of financially excluded households and to compare them with the number of financial institutions using debt. The data used in the analysis are the survey data from the Seoul Welfare Foundation on August 1, 2014 to September 15, 2010, for the Hope Plus bankbook and the Dream Nae - rae bankbook subscriber. Among the respondents, 62762.4%) were used for final analysis. 347 (55.3%), 187 (29.8%), and 93 (14.8%) were the subjects of the analysis. The main results are as follows. First, more than 90% of financial under employers responded that they had financial education experience, considering that the target of this study is the participants of low- income asset formation program operated by Seoul City Welfare Foundation, Education and training. About one quarter of the surveyed people were getting information through the government office. Second, the first financial institution accounted for 13.8% of loans from two or more financial institutions, which are commercial banks (one financial institution). However, in the second financial sector such as card companies, insurance companies, In the case of financial underprivers who received loans, around 20% received additional loans from two or more financial institutions in addition to the first financial institution. This suggests that there is a high possibility that additional loans will be tried if the first marginalized banker is alienated from the financial sector, and that there is a high possibility that the second bank will continue to be in high interest rate. Third, in the case of financial aliens who have borrowed from three financial institutions, the ratio of exploring information through PC Internet or mobile is higher than that of financial aliens who have borrowed from one or two institutions. As a result, the proportion of financial institutions selected was higher. In addition, the share of high interest rate debt in total liabilities was relatively higher in the financial underwriting group, which was borrowed from three financial institutions, and the main purpose of borrowing was residential funds or living funds. Fourth, financial alienation, which was borrowed from three financial institutions, had a higher proportion of short-term delinquencies or defaults than other financial under wenters, and had more debt collection experience.

Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting.

CEO Inside Debt Incentives and Corporate Tax Sheltering

ABSTRACTThis paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk‐appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash‐out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt‐like compensation for corporate tax policies.

An Empirical Study of International Spillover of Sovereign Risk to Bank Credit Risk

AbstractThe severity and complexity of the recent financial crisis has motivated the need for understanding the relationships between sovereign ratings and bank credit ratings. This is the first study to examine the impact of the “international” spillover of sovereign risk to bank credit risk through both a ratings channel and an asset holdings channel. In the first case, the downgrade of sovereign ratings in GIIPS (Greece, Italy, Ireland, Portugal, and Spain) countries leads to rating downgrades of banks in the peripheral countries. The second channel indicates that larger asset holdings of GIIPS debt increases the credit risk of cross‐border banks, and hence, the probabilities of downgrade.

Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles

The shadow banking system comprises special purpose vehicles (SPVs) characterized by high debt, illiquid long-maturity assets funded predominantly by short-maturity debt, and tranched liabilities, also known as the capital structure of the SPV. These three features lead to an adversarial game among senior-note holders, who solve for an optimal rollover policy based on the other senior tranches with varying rollover dates. This rollover policy is, in turn, taken into account by capital-note holders (i.e., investors in the equity tranche) when choosing the capital structure (i.e., the assets-to-debt ratio) of the SPV. Rollover risk increases in the number of time tranches, resulting in a lower equilibrium level of debt and higher cost of debt. The expected life of the SPV may also be shortened. We propose a covenant-based capital structure that mitigates these problems and is Pareto-improving for equity and debt holders in the SPV.

The Effect of CEO Compensation Structure on CSR Disclosure

The determinants of CSR disclosure have not been researched extensively. In this research, using the framework from traditional voluntary disclosure studies, we connect CEO compensation structure with CSR disclosure. Following Nagar, Nanda, and Wysocki (2003), we predict that more stock compensation for the CEO would lead to more frequent CSR disclosures, by aligning the interest of CEOs and the interest of shareholders. Similarly, we expect that the debt compensation of the CEO would align the interest of CEOs and the interest of debt holders. Because debt holders prefer more disclosure about the private information of CEOs, we predict that there is positive relation between the amount of CEOs’ debt compensation and CSR disclosure. We find that when the CEO’s stock compensation and debt compensation increases, the firm discloses CSR reports more frequently. Prior study has found that the founder CEO does not issue voluntary disclosures frequently (Chen, Chen, and Cheng, 2008). However if the founder CEO receives a substantial amount of stock compensation, the probability of issuing CSR reports increases. This paper sheds lights on the CSR studies by linking the framework of voluntary disclosure studies to CSR disclosures.

Country‐level governance quality, ownership concentration, and debt maturity: A comparative study of Brazil and Chile

AbstractManuscript typeEmpiricalResearch Question/IssueThis study investigates the interplay between country‐level governance quality and the capital structure choice at the firm level in Brazil and Chile. We examine the association between a firm's ownership concentration and its debt maturity structure and whether country‐level governance quality influences this association.Research Findings/InsightsUsing a large firm‐level dataset from Brazil and Chile for the period 2008–2013, we find a positive association between low ownership concentration and debt maturity. However, this association becomes negative when the largest shareholder has high ownership concentration. This result suggests that long‐term debt and ownership concentration act as substitute monitoring mechanisms. Moreover, debt maturity is inversely related to our aggregated index of country‐level governance quality, suggesting that in countries with governance systems that effectively protect debt holders, firms with high benefits of control (high ownership concentration) will use debt with shorter repayment periods in order to benefit from frequent monitoring by debt holders. Overall, our results support the view that financial markets tend to pressure firms with high benefits of control or greater agency conflict to make a tradeoff between the benefits of control and the cost and maturity structure of debt financing.Theoretical/Academic ImplicationsThis study contributes to the research on comparative corporate governance and capital structure. We also respond to recent calls to bridge the gap between under‐ and over‐socialized views of corporate governance by examining the interplay between firm‐ and country‐level governance variables. Our findings suggest a substitution effect between monitoring by equity holders and by debt holders, and that country‐level governance quality exerts a disciplinary influence over a firm's choice of debt maturity structure.Practitioner/Policy ImplicationsInvestors seeking to enter emerging markets such as Brazil and Chile can benefit from considering national governance factors that enhance debt holders’ external monitoring effectiveness. Because our findings show the importance of considering and improving the quality of country‐level governance, they are also useful for policy makers aiming to reform corporate governance practices in emerging markets.

Book-tax conformity and capital structure

We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms’ reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity, relative to control firms, and show that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and toward more debt in the presence of higher book-tax conformity.

The Indian Household Finance Landscape

Using the most recent wave of the AIDIS data, we describe and attempt to explain several important features of Indian household balance sheets. When compared with data on households in a range of developed and emerging economies, Indian households on average tend to hold a high fraction of non-financial assets with particularly high relative weights in real estate and gold, hold negligible retirement assets, and non-institutional debt is their primary source of debt. These propensities are also evident along the lifecycle, as well as at almost all points in the wealth distribution, and correlated with location (rural vs. urban), education, and family composition. Controlling for demographics, substantial state-level variation remains in asset and debt holdings which is related to state-level factors including historical inflation volatility, the share of the population in public sector employment, and the density of bank branch networks. We discuss the potential implications of these results for policy.

CEO Inside Debt Incentives and Corporate Tax Sheltering

This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk-appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash-out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt-like compensation for corporate tax policies.

Illiquidity and Indebtedness - Optimal Capital Structure Under Realistic Default Triggers in a Double Barrier Option Framework

Existing dynamic capital structure models are based on single triggers determining bankruptcy, mainly over-indebtedness or illiquidity. The latter one tends to underestimate optimal capital structures by ignoring capital providers' flexibility to inject fresh money. The former one leans towards overestimation as it neglects agency conflicts between equity investors and debt holders while implying infinitely deep pockets of equity investors. This article incorporates both constraints, over-indebtedness and illiquidity, examining corporate debt value and optimal capital structure in a double barrier world with knock-in and knock-out options. We are first to derive closed-form solutions for all value components of a levered firm and for the optimal capital structure in such a setting. By testing our model for firms publicly listed in the US, we gain evidence that incorporating both triggers allows for capital structure estimations that are in accordance with empirical findings.

Liquidity Provision, Bank Capital, and the Macroeconomy

New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less short‐term debt (as debt holders must become shareholders), or short‐term debt is not reduced and the banking system acquires nonbank equity (as the shareholders in nonbanks become shareholders in banks). The welfare effects involve a trade‐off because bank debt is special as it is used for transactions purposes, but more bank capital can reduce the chance of bank failure (producing welfare losses).

Strategic Default and Capital Structure Decision

This paper investigates whether overleverage identifies companies' strategic default incentives. The results show that overlevered firms have lower equity beta than their counterparts. The strategic default option becomes more valuable when the firms are overlevered. Firms are more likely to be overlevered when they have more strategic advantages over their debt holders (i.e. high liquidation costs, high shareholder's bargaining power, and low renegotiation frictions). In addition, for bankrupt firms, overleverage successfully identifies the high probability of filing for the reorganisation bankruptcy code and emerging from the reorganisation plan. Overall, these findings suggest that overleverage is the outcome of an endogenous capital structure decision, which implies a strategic incentive to default.

Tax avoidance and earnings management of firms in Ghana: does the funding strategy matter?

The agency perspective of tax avoidance suggests a complementary relationship between tax avoidance and earnings management. Thus, this paper seeks to evaluate how the firm's financial policy affects the relationship between corporate tax avoidance (CTA) and earnings management (EM) using a sample of 119 firms from emerging and developing countries over a four-year period 2010-2013. We employ system methods of moments (GMM) and find that the financing structure of a firm plays little role on the firm's incentives to engage in avoidance activities and/or manage their earnings. The results imply that monitoring managerial diversionary behaviour by relying on external monitoring mechanism provided by debt holders does not lead to a reduction in EM associated with increased tax avoidance activities.

Debt Holder Monitoring and Implicit Guarantees: Did the BRRD Improve Market Discipline?

This paper argues that the introduction of the Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver.

Dominion Resources: Cove Point

The treasurer for Dominion Resources Inc. (Dominion), a major U.S. diversified producer and distributor of energy, was heading to meet with the company's investment bankers to discuss the impact of a large project upon Dominion's financing strategy for the next five years. The Cove Point liquefied natural gas (LNG) project would require $3.6 billion to build and represented one of the largest single capital investments in the company's 100-plus year history. Excerpt UVA-F-1740 Rev. Feb. 18, 2016 Dominion Resources: Cove Point Scott Hetzer quickly shoved his notes and laptop into his briefcase and slipped on his suit jacket. Hetzer, the treasurer for Dominion Resources Inc. (Dominion), a major U.S. diversified producer and distributor of energy, was heading to meet with the company's investment bankers to discuss the impact of a large project upon Dominion's financing strategy for the next five years. The Cove Point liquefied natural gas (LNG) project would require $ 3.6billion to build and represented one of the largest single capital investments in the company's 100-plus year history. It was February 15, 2013, and the recent boom in hydraulic fracturing (fracking) had turned the U.S. natural gas market on its head, creating the opportunity to transform Cove Point from an importer of natural gas into primarily an exporter. In the company's 2012 annual report, CEO Thomas F. Farrell II highlighted the project by stating, “We firmly believe that incorporating liquefaction and export capability into our Cove Point LNG import terminal located on the Chesapeake Bay in Lusby, Maryland, can be beneficial both to you, our shareholders, and to gas producers operating in the eastern half of the U.S.” The surging demand for LNG had allowed Dominion to sign long-term contracts for 100% of Cove Point's projected capacity, mitigating the project's financial risk. By mid-2014, Dominion expected to receive the final required permits from the regulatory authorities, such that the only remaining task was to revise the company's financing strategy from 2013 to 2017 to include the $ 3.6billion investment. After settling into the meeting room in Dominion's Richmond, Virginia, headquarters across from the team of bankers, Hetzer began, “Cove Point represents a terrific opportunity for all Dominion's stakeholders, but financing this sizable project clearly presents multiple financial challenges.” Hetzer knew that determining the optimal mix of debt and equity would need to address the impact upon Dominion's credit ratings as well as regulators and Dominion's existing stock and debt holders. . . .

Debt-for-Control Investing in Asia: Nine Entertainment Company

In October 2012, Australian media giant Nine Entertainment Company (NEC) was in the midst of a major debt renegotiation that would determine whether the company received a renewed chance to survive and thrive or faced a long and potentially costly insolvency proceeding. Six years earlier, private equity firm CVC Partners (CVC) had taken a controlling position in NEC, culminating by 2008 in one of the largest leveraged buyouts (LBOs) in the Asian market. Now, due to declining revenues in the Australian media markets in which it operated, NEC was in jeopardy of defaulting on its senior secured debt. A large portion of the senior secured debt was owned by Apollo Global Management (Apollo) and Oaktree Capital Management (Oaktree), two large alternative investment funds that specialized in managing—and often taking over—companies in financial distress. Apollo and Oaktree prepared to face off against NEC's CVC owners—as well as holders of NEC mezzanine debt, dominated by a credit arm of Goldman Sachs—in what could culminate in a costly restructuring process and bankruptcy filing. In the middle of the negotiations was David Gyngell, NEC's CEO and son of the famed Nine Network TV broadcaster, Bruce Gyngell. What were his options? Could he facilitate a consensual agreement across the varied investors representing the debt and equity holders in this case? Or would NEC be forced to file for the Australian version of a bankruptcy proceeding?This case is appropriate for graduate or undergraduate students with an introductory background in finance. It enables students to learn from a real-life case about a variety of relevant topics, including the Australian media market, the Asian LBO market, and restructuring options in industrialized economies outside the United States. Excerpt UVA-F-1800 Rev. Dec. 13, 2017 Debt-for-Control Investing in Asia: Nine Entertainment Company Overview It was the morning of October 16, 2012, and David Gyngell, CEO of Nine Entertainment Company (NEC), faced one of the biggest challenges of his business career. NEC and its leading assets, Nine Network Australia (television) and ACP Magazines, were leading institutions in the Australian media landscape. Gyngell had accepted the job of CEO with relish less than a year before. He had been brought in by NEC's private equity owners, CVC Capital Partners (CVC), to help restructure the media empire following the global financial crisis and a decline in advertising revenues. Yet now he had to represent the company in debt negotiations that were pitting some of the largest and most savvy investors in the world against each other, hedge fund Oaktree Capital Management (Oaktree) and private equity firm Apollo Global Management (Apollo) versus the venerable Goldman Sachs. Media reports that morning had described the forthcoming negotiations as “D-day,” with the company “on the brink of collapse” and its future “on tenterhooks.” As Gyngell knew, the media loved talking about the media, especially when it involved the financial distress of one of Australia's leading companies. . . .

Sovereign Risk and Bank Risk-Taking

I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.

Why are Banks Not Recapitalized During Crises?

I develop a model where governments might prefer to have an undercapitalized domestic financial sector during crises. Weak banks optimally tilt their sovereign bond portfolio towards domestic securities that are positively correlated with banks’ other sources of revenues. Governments anticipate this gambling-forresurrection motive and therefore face a trade-off when setting capital regulation. Undercapitalized banks act as buyers of last resort for home public debt at the cost of crowding-out private lending. Following recapitalizations, governments may face lower debt capacity and higher sovereign yields. European stress test data support the proposed mechanism as high leverage banks increased domestic government bond holdings relative to low leverage banks during the crisis. The general equilibrium model can rationalize, in the context of the Eurozone periphery, the increased banks’ holdings of domestic public debt, the ecreasing private lending, and the prolonged undercapitalization of the banking sector.

Private and Public Risk Sharing in the Euro Area

This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing.