Debt Holders Research Articles

Normalizing the Central Bank's Balance Sheet: Implications for Inflation and Debt Dynamics

AbstractWe explore the effects of reducing the overall size of the central bank's balance sheet and lowering its maturity structure. To do so, we consider an environment where fiscal policy is traditionally passive and the central bank follows the Taylor principle. In addition, the monetary authority has also explicit size and compositional rules regarding its balance sheet. Agents in this economy face limited commitment in some markets and government bonds can be used as collateral. When short‐ and long‐term public debt exhibit premia, changes in the central bank's balance sheet have implications for long‐run inflation and real allocations. To ensure a unique locally stable steady state, the central bank should target a low enough maturity composition of its balance sheet. In our numerical exercise, calibrated to the United States, we find that long‐term debt holdings by the central bank should be less than 0.5 times of their short‐term positions. Moreover, the process of balance sheet normalization should aggressively respond to the total debt issued in the economy relative to its target. These findings depend on the degree of liquidity of long‐term bonds. The more liquid long‐term bonds are, the lower is the value of the composition threshold and the parameter space consistent with unique and stable equilibria is smaller. In addition, we consider a modified Taylor rule that takes into account the premium. Such a rule increases the prevalence of multiplicity of steady states and delivers lower welfare. Thus, we argue that the traditional Taylor rule is appropriate for managing interest rates in the presence of premia.

Which Loans Do We Take? A Micro-Level Analysis of Croatian Households' Debt Participation

This paper uses a new data set in order to explore micro-level patterns of household borrowing in Croatia. By analyzing cross-section data from the Household Finance and Consumption Survey, conducted for the first time in Croatia in 2017, we present the structure of household debt holdings and identify several household characteristics associated with debt participation in three types of bank debt: secured debt, non-collateralized loans, as well as overdrafts and/ or credit card debt. Our results indicate that: a) households with middle-aged heads tend to participate more and hold larger amounts of all three debt types; b) credit constrained households are more likely to take non-collateralized loans; c) inability to finance consumption and willingness to take risks when making saving and investment decisions contribute to participation in overdrafts and/or credit card debt.

Key audit matters and debt contracting: evidence from China

PurposeIn an effort to make audit reports more informative to users, the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board adopted a standard that requires auditors to disclose key audit matters (KAMs). This paper aims to explore the impact of the risk information provided by KAMs on corporate debt contracting.Design/methodology/approachIn China, the KAM standard went into effect for A + H cross-listing companies in 2017 and became mandatory for all listed companies in 2018. This study takes this as an exogenous shock to examine the impact of the KAM disclosures on debt contracting. This study also designs a path analysis to open the “black box” between the risk information in KAMs and the risk perception of creditors. Moreover, This study conducts a textual analysis on the KAMs information based on samples after the release of the KAM standard.FindingsThis study conducts difference-in-difference tests and find that the KAM disclosures decrease interest rates and increase the proportion of long-term debt. Path analyses reveal that the KAM disclosures lead to more favorable debt characteristics through decreasing information asymmetry. This study also finds that the more KAMs are disclosed, the more favorable debt characteristics are and that different categories of KAMs have different effects on debt contracting.Originality/valueThis paper highlights the benefits of KAM disclosures, which are consistent with the convergence argument of risk information disclosures. Investors’ reactions to KAMs are mixed because of the differences in how professional investors and nonprofessional investors interpret information. This study provides evidence of incrementally informative nature of KAMs from the perspective of debt holders, who are professional information users.

Does managerial compensation influence price efficiency?

We examine the effects of managerial compensation (i.e., inside debt holdings of chief executive officer, CEO) on price efficiency, proxied by the measures of stock price delay. Based on a sample of 2617 firm-year observations for the 2006–2017 period, we find that CEO inside debt holdings have a significant positive effect on price efficiency. Furthermore, we find that stock liquidity plays a critical role in the effect of inside debt on price efficiency. Moreover, our study underscores the importance of CEO characteristics for understanding the relationship between CEO inside debt holdings and price efficiency. Consistent with our expectation, additional analyses show that this positive association is stronger for firms managed by CEOs who are male, older, and have longer tenure. Our study deepens the understanding of how managerial compensation shapes managerial incentives and offers insights to policymakers interested in enhancing price efficiency in shaping managerial incentives.

Student Debt and Healthcare Service Usage

This study investigated the association between student debt and healthcare service usage utilizing pooled data collected from the 2015 to 2018 waves of the National Financial Capability Study. The findings of this study suggest that, when compared to those without student debt, student debt holders have a lower likelihood of filling prescriptions for medicine, going to a doctor or clinic when they have a medical problem, and going to medical tests, treatments, and follow-up appointments. The findings and ensuing discussion add to the mounting evidence of the many challenges associated with student debt repayment.

Analisis Dampak Pengungkapan Sustainability Report Terhadap Nilai Perusahaan

To achieve sustainability, a company gets all stakeholders' trust by publishing a Sustainability Report. The report aims to show that their business focuses on and responsible to all stakeholders through economic, environmental, and social dimensions. This study tests the effect of disclosing each dimension on the firm value on 34 listed companies that consistently published Sustainability Reports in 2015-2017. The researchers find that disclosure of economic and social dimensions affects firm value because the company is considered more transparent, has accurate forecasting and analysis, low information asymmetry, gains more trust from investors and debt holders, and meets all stakeholders' expectations. Whereas, disclosure of environmental dimensions does not increase firm value because it is considered prevalent, mandatory, normative, and not attractive to catch the stakeholders' attention. This study complements the diverse findings regarding the benefits of disclosing each activity on firm value in Indonesia. It may occur due to inconsistencies in stakeholders' responses, differences in samples, potential interrelationships between the three dimensions of disclosure endogeneity problems between disclosure with financial performance.

Service Strategy and Implementation of Digital Sharia Pawnshops in Increasing the Number of Customers in Rantau Prapat

Pledge as one of the categories of debt-receivable agreements, for the trust of the lender, the debt holder swears merchandise as collateral for obligations. The collateral remains the property of the person who pledged it, but is limited by the recipient of the votive. The special functional components of sharia second-hand shops can be completed by Islamic financial institutions, especially sharia second-hand shops, both as private and government organizations. Improvements are currently accelerating, this is evidenced by progress in various fields, especially innovation. However, not all innovations provide accommodation and positive effects for their clients if they are not handled as expected. This study plans to determine the degree of business administration system for the Digital Sharia Pawnshop application (PSD) in supporting exchanges and increasing potential in facing competition, and to determine the adequacy of online administration carried out by Rantau Prapat Syariah Pegadaian through the Digital Sharia Pawnshop Application (PSD) in expanding the number of customer. Discussion of exam results using a graphical methodology. From the results of this review, it shows that with the implementation of a sophisticated sharia second-hand shop (PSD) application, it is very easy for the general public to make transactions at sharia second-hand shops. So the Digital Sharia Pawnshop (PSD) for this situation sharpens the organization's special value in facing competition. The effectiveness of PSD is reviewed through 7 dimensions, namely efficiency, reliability, compliance, service privacy, responsiveness, compensation, and contact.

The impact of CEO inside debt on the coinsurance effect and excess value of diversification

The tenets of agency theory suggest that CEO inside debt holdings induce risk-reducing corporate investments. Further, the coinsurance hypothesis implies that diversification strategies designed to decrease cross-segment correlations reduce firm risk. Motivated by these views, we hypothesize a positive relationship between CEO inside debt holdings and the risk-reducing (e.g., coinsurance) effect of diversification. Moreover, we examine the impact of coinsurance, induced by CEO inside debt holdings, on the excess value of diversification. Using a sample of 4053 firm-year observations for the period of 2006–2013, we document a positive relationship between CEO inside debt and the extent of the coinsurance effect of diversification. In addition, consistent with the implications of the managerial risk aversion hypothesis that risk-reducing corporate diversification strategies destroy shareholder value, our results show that the coinsurance effect of diversification, when induced by CEO inside debt, negatively affects the excess value of diversification.

CDS Channels of Influence on Discretionary Accruals

Existing studies indicated that firm debt holders can use the credit default swap (CDS) market to hedge their credit risk, and thus they would reduce their monitoring of the firms, leading to largely distressed firms shirking and increasing positive abnormal earnings accruals. Besides providing insurance, however, the CDS spreads also perform price discovery of credit risk information sought by trade creditors and potential lenders who are not protected. High absolute abnormal discretionary accruals or bad earnings quality, especially negative abnormal accruals, would lead adverse CDS price signals that are very costly to the firm. This compels the firm under nondistressed conditions to be able to improve cash holdings, cash flows, working capital, and earnings reporting quality. Our new results indicate that the channels of improvement in earnings quality are through a firm’s large accounts payable and low cash holdings related to trade credit exposures. In the longer run, this leads to higher profitability and improved firm value. Thus, the generation of public information via the CDS market reduces information asymmetry and can enforce greater discipline in discretionary accounts reporting.

A retail investor’s predicament: the JPA story

Learning outcomes The case intends to achieve the following objectives with the audience: Apply the knowledge of fundamental analysis to select good companies for investment; analyse companies for investment through the contrarian strategy; and appreciate the need of own research before investing. Case overview/synopsis This case study provides an insight into the general process around investment for a retail investor. The protagonist of the case, Rajdeep Sharma, is a middle-class, salaried IT consultant from India. He has taken inspiration from Rakesh Jhunjhunwala, a renowned investor in India, and started his journey on the road to generate wealth. He decides to adopt the contrarian strategy and identifies Jaiprakash Associates Limited (JPA) to invest his savings. JPA is a large conglomerate with decades of experience, which has diversified business across multiple sectors. However, JPA’s pursuit of growth and expansion has created financial issues because of a large amount of debt it has amassed over the past few years. The company has been unable to repay its interest and principal obligations to the debt holders, making it consider a restructuring plan to meet these responsibilities. Meanwhile, Rajdeep has been optimistic about his investments but must experience excessive turmoil due to the high volatility in the company’s share prices. The case highlights the value of sound analysis, along with the impact of information on retail investors’ decision-making process. It will help prospective investors appreciate the importance of economic, sectoral and financial statement analysis before making any investments. Complexity/academic level Fundamental analysis for MBA students majoring in Finance. Supplementary materials Teaching notes are available for educators only. Subject code CSS 1: Accounting and Finance.

Fiscal policy and credit supply: The procurement channel

We show that banks’ lending exposure to firms with government procurement contracts can amplify the diabolic loop between sovereigns and banks. Using the fiscal austerity measures implemented during the 2010-2011 European sovereign debt crisis as a shock to government procurement, we find that banks with higher exposure to these firms reduced lending significantly more than banks with lower exposure, controlling for firm-specific credit demand. The reduction in credit supply is economically as important as the effect of banks’ sovereign debt holdings, and affected both firms with and without government contracts. Firms with lending relationships with affected banks experienced lower sales growth, assets growth, employment growth, and investment. This decrease in real economic activity is likely to reduce tax revenue, further amplifying the diabolic loop.

Spillover Effects from the Volkswagen Emissions Scandal: An Analysis of Stock and Corporate Bond Markets

This study examines spillover effects following Volkswagen’s admission of emissions cheating. We first estimate initial operational losses of 8.45% of Volkswagen’s equity market capitalization on the date before the announcement, reputational losses up to five times these losses, and significant negative shocks to its stocks and bonds. Analyzing spillover effects from this shock beyond the usually only measured losses in equity value, we find significant negative net spillover effects to European competitors and suppliers in both stock and bond markets. Studying the economic effects in more detail, we show that Volkswagen’s total losses of 27.4 billion euros in terms of changes in equity market values over the first five event days are almost entirely composed of abnormal losses. Furthermore, competitors (suppliers) overall suffered 18.3 (12.6) billion euros of abnormal losses during this time, with 60% (69%) of the firms exhibiting negative changes, especially European competitors and suppliers connected to Volkswagen. These figures are further increased by negative bond market value changes. Overall, our results strongly emphasize that neglecting debt holders losses can lead to an underestimation of such events.

CEO inside debt holdings and trade credit

AbstractThis study investigates the relationship between chief executive officer (CEO) inside debt holdings (pension benefits and deferred compensation) and use of supplier‐provided trade credit. We provide evidence that CEO inside debt holdings are negatively related to the use of trade credit. Our results are robust to the use of alternative regression estimation and alternative measures of key variables. We exploit the final enforcement of Section 409A of the Internal Revenue Code (IRC) as an exogenous shock to inside debt holdings. Our difference‐in‐difference regression analysis establishes a causal relationship. In addition, we provide evidence that our documented results are not driven by omitted variable bias. We also employ instrumental variable regression estimation using heteroskedasticity‐based instruments to mitigate the endogeneity concern. Our cross‐sectional analyses reveal that the relationship between CEO inside debt holdings and trade credit is more pronounced in firms with poor information environments and greater financing constraints. Overall, findings from our study suggest that CEO inside debt has important implications for the financing policy of the firm.

Sovereign debt holdings and banks’ credit risk: Evidence from the Eurozone

This paper investigates the direct effect of sovereign debt holding on banks’ credit risk. Using individual Eurozone listed banks’ information, we find that holding sovereign debt improves the level of banks’ credit risk, but this effect is reversed when the credit risk associated with such debt is taken into account. For this purpose, we consider three alternative sovereign debt holding proxies and two types of banks’ credit-risk measures, both forward- and backward-looking. We find that the transmission of credit risk from sovereign debt holdings to banks’ credit risk is only captured when forward-looking credit-risk measures, based on market data, are used.

Beyond Home Bias: International Portfolio Holdings and Information Heterogeneity

Abstract We show that international portfolios reflect the underlying heterogeneity in investors’ beliefs. Using data on the foreign sovereign debt holdings of European banks matched with their forecasts on future bond yields, we find that expecting higher returns and having more accurate forecasts are associated with larger bond holdings. Crucially, the elasticity of portfolio holdings to expected returns is increasing in the precision of the forecast, implying that investors optimally exploit comparative advantages in information production. We rationalize the results in a model in which partial information specialization arises endogenously by introducing a degree of unlearnable uncertainty about asset payoffs. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Decomposing the factors influencing household debt: the case of China

ABSTRACT This study discusses the issue of household debt in China based on the data of China household finance survey completed in 2015. The quantile regression model is adopted as the key research method, and the conclusions are derived are as follows. The increase in household debt in China is significantly correlated with several financial factors, including household assets and income, as well as the socioeconomic factors of education, age and working unit, in addition to senses of security and happiness. The assets of highly indebted households influence their debt in a positive way; the influence of income on household debt decreases as the quantile increases; the householder age has a negative effect across all household quantiles, and the debt holdings are less at older ages. The influence of household educational background dramatically increases from negative to positive following the indebtedness level, suggesting that enormous debt burdens may be generated from the cross effect of disadvantages in income and educational background. By decomposing the results of the quantile regression estimations, the evidence suggests that sufficient financial knowledge is essential in avoiding the financial distress from household debt.

Peranan Hukum Kepailitan Menghadang Potensi Kepailitan Dalam Industri Keuangan Syariah

Dispute resolution in sharia economics can be pursued through litigation. If referring to Article 2 passage (1) of Law No. 37 of 2004 concerning Liquidation and Delay of Obligation Installment Commitments, it is expressed that a debt holder who has at least two lenders and doesn't pay off somewhere around one obligation that is expected and can be If the case alluded to is a sharia monetary chapter 11 case, the court alluded to in this Law is the Strict Court. The exploration technique utilized is standardizing lawful examination. However, along with the growth of ordinary companies and companies that act as financial institutions, both banks and non-banks, the government should respond by providing a special court to resolve commercial cases committed by Islamic companies. Thus, it is necessary that the Commercial Court within the Religious Courts be established in order to fulfill legal certainty, usefulness and elements of justice for corporate legal entities that run their business with sharia principles.

Managerial risk-reducing incentives and social and exchange capital

This study investigates the impact of managerial risk-reducing incentives on the firm's social and exchange capital. Using CEO inside debt holdings to proxy for the incentives of risk-averse managers, we find that CEOs with more inside debt holdings are likely to invest more in building social capital, which targets broader society and potentially offers anti-risk protection advantages, to shield the value of their inside debt. However, our results further show that managerial risk-reducing incentives have no impact on firms' exchange capital, suggesting the need to recognize the difference between social and exchange capital. These findings corroborate the view that CEOs invest in social capital as a risk management strategy. Furthermore, this paper presents an understanding of the role that institutional investors play in moderating the impact of managerial risk-reducing incentives on social capital. Our results suggest that institutional investors constrain CEOs that have greater inside debt incentives from investing in social capital. However, they are still willing to increase the investment in social capital for risk management purposes when firm risk is high.

CEO inside debt and the acquisition of private targets

AbstractWe find a strong positive association between the inside debt holdings (pension benefits and deferred compensation) of CEOs and announcement‐period abnormal returns (CARs) of acquiring firms bidding for private targets. In addition, gains to acquirers with high inside debt persist for at least 3 years post‐acquisition. Further analyses suggest that our results are largely driven by firms with lower levels of manager‐shareholder agency conflicts as proxied by higher transparency in firm activities, presence of a less powerful CEO, or presence of stronger monitoring. Our results are robust to an array of sensitivity tests.

Corporate social responsibility and inside debt: The long game

We examine the effect of CEO inside debt on corporate social responsibility (CSR). We document a positive relation between CEO inside debt and CSR. This positive relation is attenuated not only when firms face high risk, but also when firms have high short-term institutional ownership. Our evidence supports the view that CEOs with large inside debt holdings are more concerned about firm sustainability and, are therefore more likely to prefer CSR for long-term firm benefits, i.e., the long game. We also find that CSR and CEO inside debt jointly exert a significantly positive impact on long-run stock performance, particularly in the presence of a low level of short-term institutional holdings. Overall, our findings highlight the importance of aligning institutional investor preferences with CEO incentives in order to maximize shareholder benefits from CSR investment.