Debt Holders Research Articles

DISTRIBUTIONAL INCENTIVES IN AN EQUILIBRIUM MODEL OF DOMESTIC SOVEREIGN DEFAULT

The European debt crisis shares features of historical episodes of outright default on domestic public debt about which little research has been done. This paper proposes a theory of domestic sovereign default in which a government chooses debt and default optimally, responding to distributional incentives affecting the welfare of risk-averse agents who are split into debt holders and non-holders. Equilibria with debt do not exist if the government is utilitarian and default is costless. Adding exogenous default costs, the model supports equilibria with debt exposed to default risk in which debt falls as the fraction of agents who own the debt falls. Debt can also be sustained if the government’s welfare weights are biased in favor of bond holders, resulting in equilibria in which debt rises as debt ownership is more concentrated. These results are robust to adding a second asset, opening the economy to foreign investors, or introducing taxes as an alternative redistributive policy instrument.

To Be Rather than to Seem: Fiscal Responsibility and the Political Economy of North Carolina

Real state spending per capita has increased fourfold in North Carolina since 1970. Three sources of revenue allowed for this increase: (1) tax increases, (2) increased debt, and (3) increased federal transfers. The latter two revenue sources have served to mask the true cost of increased spending—that is, they have created a fiscal illusion by transferring costs to future generations of workers and by dispersing costs across all federal taxpayers and debt holders. We argue that despite recent reforms, North Carolina’s long-run spending trend is unsustainable. To return the state to long-term fiscal solvency, reforms must likewise be focused on long-term institutional incentives. To be competitive with other states, North Carolina’s taxes, regulations, and property rights protections must all be competitive.

Sovereign Risk and Deposit Dynamics: Evidence from Europe

The unprecedented expansion of sovereign balance sheets since the global financial crisis has given a new meaning to the term sovereign risk. Developments in Europe since early 2010 presented new challenges for the functioning of private banks in an environment of heightened sovereign risk. This paper uses an innovative way of measuring the perception of sovereign risk and its impact on deposit dynamics during 2006–11. Using an extension of a common market discipline framework, it shows that exposure to sovereign risk may have limited the ability of banks in Europe to attract deposits. The results are robust to inclusion of conventional measures of bank performance and the sector-wide holdings of foreign sovereign debt.

Sovereign Risk and Deposit Dynamics: Evidence from Europe

The unprecedented expansion of sovereign balance sheets since the global financial crisis has given a new meaning to the term sovereign risk. Developments in Europe since early 2010 presented new challenges for the functioning of private banks in an environment of heightened sovereign risk. This paper uses an innovative way of measuring the perception of sovereign risk and its impact on deposit dynamics during 2006–11. Using an extension of a common market discipline framework, it shows that exposure to sovereign risk may have limited the ability of banks in Europe to attract deposits. The results are robust to inclusion of conventional measures of bank performance and the sector-wide holdings of foreign sovereign debt.

Causality between sovereign, quasi-sovereign credit risks and global volatility: The case of Russia

The article examines causalities between sovereign, most important quasi-sovereign CDS prices (Gazprom, VTB, Sberbank) for Russia and the global volatility factor embedded in the VIX index dynamics. The analysis refers to the post-bailout period in this major emerging economy (May 2009–July 2013). The causalities are assessed in the time (the Hong test) and frequency (the Breitung–Candelon test) domains. The VIX index dynamics has a strong impact on all Russian CDS, but also receives a non-negligible feedback from them. The sovereign and quasi-sovereign CDS prices exhibit a strong causal connectedness in both domains, with the impact of the quasi-sovereigns (in particular, that of banks) getting more pronounced in the longer run, i.e. over longer time horizons and at lower frequencies. High foreign exposure of the quasi-sovereigns, explicit/implicit public guarantees and the holdings of the Russian sovereign debt on their balances underlie the causalities. Given the systemic role that the government-controlled entities play in the Russian economy, this may lead to the “too big to save” effect with negative implications for financial and fiscal stability.

Debt Maturity and the Liquidity of Secondary Debt Markets

We develop an equilibrium model of debt maturity choice of firms, in the presence of fixed issuance costs in primary debt markets, and an illiquid over-the-counter secondary debt market with search frictions. Liquidity in this market is related to the ratio of buyers to sellers, which is determined in equilibrium via the free entry of buyers. Short maturities improve the bargaining position of debt holders who sell in the secondary market and hence reduce the interest rate that firms need to offer on debt. Long maturities reduce re-issuance costs. The optimally chosen maturity trades off both considerations. Firms individually do not internalize that choosing a longer maturity increases the expected gains from trade in the secondary market, which attracts more buyers, and hence also facilitates the sale of debt issued by other firms. As a result, the laissez-faire equilibrium exhibits inefficiently short maturity choices.

English

This study examined the relationships between corporate cash holdings (corporate liquidity policy) and compensation incentives, offered by Karachi Stock Exchange listed non-financial companies, to their CEOs, Directors and Executives, keeping in view the managerial shareholding of the firm, levered capital structure and firm size. The regression results suggested that the CEO Compensation and Executive Compensation have a significant positive relationship with Corporate Cash Holdings. Size of the firm - a control variable - also has a significant positive relationship with Corporate Cash Holdings. We however, found that Leverage and Managerial Shareholdings have a significant negative relationship with the Corporate Cash Holdings. It is concluded that management of the companies do have influence on Corporate Cash Holdings positively, but at the expense of debt holders, as we have observed a significant negative relationship between leverage and corporate cash holdings viz-a-viz corporate liquidity policy. Another important conclusion drawn from the observed results is that managers having share in the ownership of the companies tend to influence the corporate liquidity policy of the companies. Key words: Karachi Stock Exchange, compensation incentives, corporate liquidity policy.

Domestic Debt and Sovereign Defaults

This paper examines how domestic holdings of government debt affect sovereign default risk and government debt management. I develop a dynamic stochastic general equilibrium model with both external and domestic debt that endogenously generates output contraction upon default. Domestic holdings of government debt weaken investors' balance sheets and induce a contraction of credit and output upon default. I calibrate the model to the Argentinean economy and show that the model reproduces key empirical moments. Introducing domestic debt also yields relevant normative implications. While domestic debt is crucial to determining the risk of default, the efficient internal-external composition of debt cannot be achieved without government intervention. Pigouvian subsidies can restore efficiency.

VAT Evaluation of a 2.25' Coiled Tip Guidewire PIV to Replace Non-Clinically Indicated Midlines/PICCs for a Hospital System

Managing a company while taking consideration that all stakeholders in the decision making process is the principle underlying the idea that company value achievement is not only a value for the claim owner of the company's assets. Stakeholder value is considered impossible to be arranged in a form of a single value, but as a qualitative and quantitative comprehensive measurement. This article proposes a quantitative measurement approach with fundamental principle of the attainment of the most minimal discrepancy between the welfare of the debt holder and shareholder, and the welfare of other stakeholders besides those two parties. The type of this paper is conceptual

Institutional Ownership and Earnings Management in India

Influence of institutional ownership has been hypothesised to efficiently monitor the managerial decisions especially discretionary role of managers in reporting earnings. The managers have been found to misrepresent the quality of earnings for a dividend declaration; new issue; takeovers and for affirming debt holders of their financial position. Panel data methodology focusing on firms listed in CNX 500 in National Stock Exchange empirically examines the impact of institutional ownership on the earnings management practices in India. Earnings management is measured using discretionary accounting accruals. Firms with higher institutional holdings are found to have higher earnings quality thus restricting managers from using their discretionary powers to report earnings. Institutional ownership has a negative relationship with earnings management for larger and matured firms. Growing firms are found to be having higher earnings management. Institutional investors monitor the firms and hence reduce aggressive earnings management practices within the firm. Foreign institutional ownership also has a negative relationship with earnings management.

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 headquarter relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer bonds over loans. We conclude that debt holders perceive social capital as providing environmental pressure constraining opportunistic firm behaviors in debt contracting.

Institutional Ownership and Cash Holding

Background/Objectives: This paper examines the influence of companies' specific governance mechanisms, namely managerial ownership, board size, institutional ownership and CEO-duality, in determining cash holdings in an emerging market setting. Methods/Statistical Analysis: Sample companies are non financial and publicly listed on Bursa Malaysia Main Market for the year between 2008 and 2010. Companies in the financial, utility and infrastructures (IPC) sectors are excluded as they are subjected to different regulatory requirements. Those companies with missing financial data are also excluded. The final sample consists of 2022 observations. Based on Hausman's specification test, fixed-effects panel data model is preferable to random effects model. Therefore, the fixed-effects model is employed. Findings: This study finds that managerial ownership and CEO-duality can significantly influence higher level of cash holdings while the existence of Government Linked Institutional Companies (GLICs) and leverage level can significantly curb the existence of cash pile up. The significant influence of CEO-duality and director ownership on cash holdings suggests that agency problems are much higher for companies with these types of characteristics and it is consistent with the findings of6,20,21. Government ownership, through shareholdings by GLICs, could reduce information asymmetry problems as GLICs could monitor managerial actions and reinforces the finding of25. The findings of this study show that the Securities Commission of Malaysia's recommendation to separate the roles of CEO and chairman is good as it could reduce the abuse of power. Furthermore, institutional investors with significant shareholdings, such as GLICs, can play a role in monitoring managerial actions so that managers will not take actions that are detrimental to the interest of the minority shareholders. Application/Improvements: External monitoring, as prescribed by Malaysian Codes on Corporate Governance, either in the form of GLICs or debt holders, can curb excessive cash holdings.

Index of the Company's Stakeholders Welfare

Managing a company while taking consideration that all stakeholders in the decision making process is the principle underlying the idea that company value achievement is not only a value for the claim owner of the company's assets. Stakeholder value is considered impossible to be arranged in a form of a single value, but as a qualitative and quantitative comprehensive measurement. This article proposes a quantitative measurement approach with fundamental principle of the attainment of the most minimal discrepancy between the welfare of the debt holder and shareholder, and the welfare of other stakeholders besides those two parties. The type of this paper is conceptual

Why Bad Things Happen to Good Organizations: The Link Between Governance and Asset Diversions in Public Charities

In the United States, the IRS now requires charities to publicly disclose any significant asset diversion, which is the theft or unauthorized use of assets, that the charity identifies during the year. We use this new disclosure to investigate whether strong governance reduces the likelihood of a charitable asset diversion. Specifically, for a sample of 1528 charities from 2008 to 2012, we simultaneously examine eleven measures of governance that capture four broad governance constructs: board monitoring, independence of key individuals, tone at the top, and capital provider oversight. We find consistent evidence that good governance across all four constructs is negatively associated with the probability of an asset diversion. Of the eleven governance measures, our results indicate that monitoring by debt holders and government grantors, audits, and keeping managerial duties in-house are most strongly associated with lower incidence of fraud. Our results also indicate that the likelihood of a fraud is negatively associated with a board review of the Form 990, the existence of a conflict of interest policy, and the presence of restricted donations. In addition, we document that the likelihood of an asset diversion is negatively associated with program efficiency and positively associated with growth and organizational complexity.

Accounting Earnings, Change in Market Value and Cash Flows

Our analyses are based on the observation that the portion of change in enterprise value captured in earnings differs according to the source of value change. These sources are: (1) cash flows to/from debt holders, equity holders, and/or cash reserves; and, (2) changes in value of assets in place (i.e., enterprise returns). We demonstrate that the effect on earnings of each source of growth captures distinct aspects of accounting conservatism. Although the effect of cash flows on earnings has received little attention in the extant literature, we show that it explains more of earnings than is explained by enterprise returns. We show that the difference in the portion of negative cf. positive enterprise returns captured in current earnings is similar to the portion of negative cf. positive equity returns reported in the extant literature. We also demonstrate an interaction between the sign of returns and cash flows.

Income inequality and the composition of public debt

Purpose– The purpose of this paper is to examine the redistributive effect of domestic public debt: lenders to the government lie on the higher end of the income distribution, but the burden of debt financing falls on the entire tax base, to the extent that taxes are used to service debt. Because domestic debt is typically held by domestic lenders, this involves a redistribution of resources.Design/methodology/approach– The author uses cross-country panel data on debt composition, and run regressions of income inequality, as measured by the Gini coefficient, using various specifications, controlling for a variety of macroeconomic, fiscal and political variables.Findings– The author finds that the composition of public debt is consistently a significant determinant of income inequality: the domestic share of public debt is regressive and significant across all specifications, even controlling for total and external debt servicing, political conflict, corruption and a variety of government spending variables.Research limitations/implications– The data span 18 years (1990-2007) which means that long-run effects are hard to track. While the author has a good mix in the sample of observations from low-, middle- and high-income countries, the author is constrained in the choice of countries by the availability of data on inequality and on the composition of public debt.Originality/value– This is the first paper to examine the composition of public debt in terms of domestic and external debt, and any bearing it may have on income inequality. The finding is also new for both the public debt and income inequality literatures: cross-country panel data are consistent with the belief that domestic debt redistributes resources from the entire tax base to wealthy holders of government debt in a way that external debt does not.

The Fall and Rise of Debt: Bank Capital Regulation after the Crisis

Under the Basel capital rules for internationally active banks, subordinated debt has always been permitted to contribute a part of the bank’s regulatory capital requirements. This is a surprising concession to banks, at first sight, since debt, as a liability, cannot contribute to equity (ie the surplus of assets over liabilities). The Basel approach is explicable only on the basis that bank capital is designed to protect short-term debt holders, who might ‘run’ on the bank and cause its collapse, rather than bank creditors as a whole. Long-term debt subordinated to the holders of non-subordinated debt could conceivably discharge this function. In the financial crisis, however, subordinated debt singularly failed to discharge this role. Because debt absorbs losses only when the company is put into insolvency (bankruptcy) and states were unwilling to contemplate the bankruptcy of banks, in most cases, debt did not in fact absorb losses as anticipated. Bail-out by the state pre-empted loss falling on creditors. An initial, and wholly to be expected, response on the part of the Basel III authorities was to downgrade the role of even subordinated debt in regulatory bank capital and in the new capital buffers which Basel III introduced. It was to be allowed only where the resolution authorities could write it down or convert into equity (bail it in) in advance of insolvency. However, in a second phase of reform bail in debt bids fair to become a mandatory element in the newly devised procedures for resolving failing banks. Bail-in in resolution is changing from being a concession to banks, which want to issue debt, to a requirement imposed with the aim of giving resolution authorities sufficient room for manoeuvre to reorganise failing banks. Whilst the role of bail-in debt in future regulation is not secure – and it has fierce critics – this constitutes a remarkable turnaround for a liability that was once seen as almost beyond redemption.

Credit Risk 'Beta': The Systematic Aspect of Bank Default Risk

Using information in US and European bank and sovereign CDS spreads we study the systematic component of banks’ credit risk that stems from banks’ common exposure to sovereign default risk. Based on a default intensity model, we find that sovereign default risk is a significant factor of bank default risk. During the period 2008-2014, on average US banks are much less sensitive to sovereign risk than their European counterparts. Within Europe the systematic component accounts for quite different proportions of the total bank default risk across countries. We also empirically confirm the asset holdings channel of the risk contagion theory by showing that a bank’s credit risk Beta (a bank’s sensitivity to sovereign risk) estimated with our model is positively related to its holdings of sovereign debt. Our findings have policy implications with respect to financial stability.

Exploring the Racial Wealth Gap Using the Survey of Consumer Finances

This paper studies the racial wealth gap using data from the Federal Reserve's Survey of Consumer Finances from 1989 to 2013. We document that the mean and median wealth (net worth) of white families has consistently been much greater than that of black and Hispanic families, and the gap between them has increased in recent years. We use reduced-form OLS regressions and non-parametric decomposition techniques to assess the contribution to the racial wealth gap of life-cycle patterns, educational attainment, inheritance, attitudes toward saving and investing, and a number of additional factors. Our analysis indicates that the wealth gap between white and Hispanic families can be almost entirely attributed to differences in observable variables. Observable factors account for most of the gap between white and black families, 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. The unexplained portion of the wealth gap, for white families relative to black and Hispanic families, is greater at the top of the wealth distribution.

CEO inside debt, asset tangibility, and investment

Purpose – The authors intend to perform empirical analysis to test the theory proposed by Edmans and Liu (2011) that CEOs with more debt-like compensations care more about the liquidation value of the firm. The purpose of this paper is to examine the relations between CEO inside debt ratios and tangible assets (i.e. asset tangibility, liquidation value, and fixed asset investment). Design/methodology/approach – The authors use the Ordinary Least Square (OLS) contemporaneous and lead-lag regression analyses. They also use two-stage least-square (2SLS) regression analysis for robustness check. Findings – The findings are fourfold: first, CEO inside debt has a positive effect on asset tangibility of the firm; second, CEO inside debt has a positive effect on the liquidation value of the firm; third, CEO inside debt has a positive effect on the tangible asset investment (as measured by capital expenditures) of the firm; and fourth, these positive effects are found in both the contemporaneous year and the subsequent year and in both OLS and 2SLS frameworks. The research provides further evidence that CEOs with higher inside debt holdings exhibit safety-seeking behavior. The authors document direct proof for the theory proposed by Edmans and Liu (2011) that these CEOs, like any creditors, care a great deal of the asset tangibility and liquidation value of the firm. Originality/value – This study contributes to the existing literature by providing further empirical evidence to support that CEO inside debt holdings have impacts on firm investment decisions and capital allocations. Inside debt does help align the executive managers’ personal incentive with firms’ value, and mitigate the agency conflicts between managers and debt holders. This study provides significant empirical evidence to support the theory suggested by Edmans and Liu (2011) that CEOs with higher level of inside debt holdings do care a greater deal about the asset liquidation value of the firm, and these firms tend to invest more in tangible assets to preserve the liquidation value.