Debt Holders Research Articles

Fiscal Multipliers and Foreign Holdings of Public Debt

AbstractThis article explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. These crowding-out effects are likely to be weaker when governments have access to foreign savings when selling their debt, leading to larger fiscal multipliers. We test this hypothesis for the U.S. in the post-war period and for a panel of 17 advanced economies from the 1980s to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for these countries. We combine these data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950s and 1960s and Japan today, and larger than one when the foreign share is high, such as in the U.S. and several European countries today.

Bank foreign assets, government support and international spillover effects of sovereign rating events on bank stock prices

We study the international spillover effects of sovereign rating events on the stock returns of large banks in nonevent countries. Using S&P rating assessments from 1983 to 2018, we find that negative sovereign rating events spill over to foreign banks’ stock returns through the foreign asset holdings channel , especially if the rating shock to domestic banks is severe. Foreign sovereign debt holdings are not the only source to open such a channel. Negative sovereign rating events also spill over through foreign interbank exposures, but not through foreign claims to nonbank firms. We further find a previously undocumented positive side effect of government support to banks. The guarantee channel limits international spillover effects if banks with strong expected government support are located in countries with high sovereign ratings.

CEO Inside Debt and CSR : The Impact of CEO Retirement and Product Market Competition

Previous literature posits that CEOs with inside debt holdings are more likely to engage in corporate social responsibility (CSR) since they respond to bondholders’ demands as their appetite for risk decreases. This study examines whether a CEO’s risk concerns moderate the effect of CEO inside debt holdings on the firm’s CSR performance. We find that the positive relationship between CEO inside debt and CSR is weakened when CEOs are close to retirement, or when firms face less product market competition within their respective industries. Our results also suggest that the effect of CEO inside debt, as well as the moderating effect of CEO retirement and low competition, differs between internal and external stakeholder CSR. Furthermore, we find that the moderating effect of CEO retirement is strongly supported in propensity score matching analysis and alternative model specification, whereas that of low competition is weakly supported. Overall, this study has important policy implications for board members, managers, investors, and regulators as it highlights that CEOs’ compensation structure and risk concerns can be determinants of corporate sustainability policies.

Sovereign debt ratings and the country composition of cross-border holdings of euro area sovereign debt

This paper documents how sovereign debt ratings shape the country composition of euro area cross-border holdings of euro area sovereign debt, using granular sectoral security holdings statistics for the period 2009Q4 until 2016Q1. Credit risk is the main risk for bond investors when investing in bonds that are issued in the same currency as the currency of the investor’s home country. Sovereign debt ratings provided by rating agencies give investors key information on the creditworthiness of governments. The results in this paper show that investors respond differently to credit ratings. In particular, we find that investors from core euro area countries respond more to credit ratings than investors from peripheral euro area countries. The results show that banks and insurance companies in core countries hold significantly more sovereign bonds of countries with higher credit ratings. In peripheral countries we do not find a positive relationship between ratings and sovereign bond holdings.

The impact of simultaneous holdings of equity and debt on financial covenants in debt contracts

PurposeThe purpose of this study is to examine the effects of non-commercial banking institutions’ simultaneous holdings of equity and debt in the same firm (hereafter, dual holdings) on financial covenants in debt contracts.Design/methodology/approachBy using the DealScan database, this study tests how dual holdings affect the number of financial debt covenants.FindingsThis study finds that the presence of dual holders is positively associated with the number of financial covenants in general, suggesting that the use of financial covenants is reduced when the interests between shareholders and creditors are aligned. This study also finds that dual holder participation does not reduce the number of financial covenants in leveraged loans as much as it does in investment-grade loans. Additionally, when a dual holder has a large portion of equity stakes and loan claims in a borrowing firm, the effect of dual holdings on financial covenants is more pronounced.Originality/valueThis study contributes to debt market research by showing that dual holder participation reduces the number of financial covenants in debt contracts.

Debt holder monitoring and implicit guarantees: Did the BRRD improve market discipline?

This paper argues that the European Union’s Banking Recovery and Resolution Directive (BRRD) has 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 us to study the effects 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 bailout expectations after its enactment. Bank bonds subject to BRRD bail-in carry a 13-basis points bail-in premium in terms of the yield spread, driven by low capitalization. Banks that respond to market pressure by de-risking their portfolios are able to secure cheaper funding for instruments that are subject to bail-in.

CEO inside debt and internal capital market efficiency

Agency theory argues that managerial equity-based incentives are more effective when firm solvency is likely while debt-based incentives are more effective when firms face a greater likelihood of bankruptcy. We examine the relation between chief executive officers' (CEOs') inside debt holdings and the internal capital market allocation of multi-segment firms. We find that CEO inside debt holdings are associated with conservative capital allocation to firm segments, with the result driven by financially distressed firms. Further analysis indicates that although CEO inside debt, on average, is negatively related to firm value, the relation is positive for financially distressed firms. Our evidence indicates that inside debt holdings align the interests of managers and external creditors, inducing managers to pursue conservative capital allocation strategies that appear to be optimal for firms facing insolvency.

FINANCING AND INVESTMENT STRATEGIES UNDER CREDITOR-MAXIMIZED LIQUIDATION

We develop a contingent claim model to examine the interaction between financing and investment where equity holders decide when to default and debt holders decide when to liquidate as well as maximize the liquidation value. We show that if the debt holders maximize the residual value at liquidation, an increase in liquidation value increases the amount of debt issuance and investment quantity ex ante, delaying corporate investment. This relationship is based on the fact that an increase in the liquidation value decreases the credit spread of debt holders. These results fit well with those of existing empirical studies.

ADJUSTMENT SPEED OF DEBT MATURITY: EVIDENCE FROM FINANCIAL CRISES IN EAST ASIA

We investigate the change in adjustment speed of debt maturity for East Asian firms between 1990 and 2017 by including two exogenous shocks: the Asian Financial Crisis 1997-1998 (AFC) and the Global Financial Crisis 2007-2009 (GFC). We employ the least square dummy variable correction and find that East Asian firms have a slower adjustment of long-term debt over time. Besides, the decrease in adjustment speed of long-term debt after the GFC is more compared to the decrease after the AFC. Further analysis shows the optimal debt maturity differs across countries and industries. Another important implication of our results is that firms in high governance countries are more likely to close the gap between the actual and target debt maturity in time. Overall, debt holders and investors should consider financial uncertainties.

Redistribution and the Monetary–Fiscal Policy Mix

We show that the effectiveness of redistribution policy in stimulating the economy and improving welfare is directly tied to how much inflation it generates, which in turn hinges on monetary-fiscal adjustments that ultimately finance the transfers. We compare two distinct types of monetary-fiscal adjustments: In the monetary regime, the government eventually raises taxes to finance transfers, while in the fiscal regime, inflation rises, effectively imposing inflation taxes on public debt holders. We show analytically in a simple model how the fiscal regime generates larger and more persistent inflation than the monetary regime. In a quantitative application, we use a two-sector, two-agent New Keynesian model, situate the model economy in a COVID-19 recession, and quantify the effects of the transfer components of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We find that the transfer multipliers are significantly larger under the fiscal regime—which results in a milder contraction—than under the monetary regime, primarily because inflationary pressures of this regime counteract the deflationary forces during the recession. Moreover, redistribution produces a Pareto improvement under the fiscal regime.

중국 선전시 80 후 및 90 후 세대의 부채보유 특성에 관한 연구

본 연구는 중국 80 후 및 90 후 세대의 부채 상황을 알아보고 부채보유에 대한 특성, 부채 원인, 부채보유에 영향을 미치는 변인 등을 개인의 사회경제적 특성, 재무역량 및 재무교육 수혜여부 등과 함께 살펴보고자 하였다. 이를 위하여 중국 선전시에 거주하는 80 후 및 90 후 세대 214명을 대상으로 설문조사를 실시하였으며 주요 연구 결과는 다음과 같다. 첫째, 조사대상자의 재무적 특성 중 재무역량은 중간수준이었으며, 절반 이상(51.9%)은 재무교육을 받은 경험이 없었고, 부채보유 비율은 66.8%로, 주택구입(63.6%)이 주요 원인으로 나타났다. 둘째, 부채보유 여부에 영향을 미치는 요인은 성별, 월 소득, 자동차자산, 부동산자산, 재무기능이고, 부채잔액 규모의 영향요인은 금융자산 및 부동산 자산, 주관적 부채부담의 영향요인은 금융자산 및 재무기능으로 나타났다. 남성일수록, 월 소득이 평균집단보다 높은 경우, 재무기능수준이 낮을수록, 자동차 및 부동산자산이 많을수록 부채를 보유할 가능성이 높았으며, 금융자산과 부동산자산이 많을수록 부채잔액 규모가 큰 것으로 나타났다. 또한, 금융자산 수준이 높을수록, 재무기능수준이 높을수록 주관적 부채부담을 강하게 느끼는 것으로 나타났다. 중국 젊은 계층의 부채보유 및 부채부담은 주택 보유와 밀접한 관련을 보이고 있으며 성별에 따른 차이를 보여 남성인 경우 부채를 보유할 가능성이 더 큰 것으로 나타났다. 부채보유 행동은 재무역량에 영향을 받으므로 재무역량을 향상시키려는 노력이 필요하다.

The real effects of banks nationalization – evidence from the UK

ABSTRACT How did the nationalization of UK operating banks as a result of the 2008 banking crisis impact their client firms’ performance? We use unique firm-bank data and a propensity score matching technique and find that firms that borrowed from nationalized banks show a slight decrease in the growth of investment and innovation relative to firms that borrowed from non-nationalized banks. Interestingly, we find that firms that borrowed from nationalized banks slightly increase employment, short-term debt and cash holdings. Overall, these firms were able to maintain performance as a result of policy intervention.

Debt Holders and the Choice of Restructuring: Evidence from Dual Holders

We find a channel through which debt holders can affect corporate transactions. We show that dual holders (equity holders who also have the firm's debt in their portfolio) are sensitive to a decline in debt value in a leveraged buyout and decrease the likelihood of LBOs. We show that the stock premium in LBO events is higher for a firm with dual holders due to their loss on their debt.

Incremental Usefulness of the Parent-only Balance Sheet to Debt Holders: Evidence from Banks

Debt contracts are signed by specific legal entities. However, general-purpose financial statements prepared under U.S. GAAP and Canadian GAAP are for a consolidated reporting entity—a collection of legal entities that include the parent and any subsidiaries it controls. This reporting model results in a loss of crucial information about the individual legal entities within the consolidated reporting entity. Our study uses bank holding companies, which report both consolidated and parent-only financial statements under bank regulations, to examine whether the parent-only balance sheet provides useful information for pricing the parent’s default risk beyond the consolidated balance sheet. We find robust evidence that after controlling for the consolidated leverage ratio, the parent-only leverage ratio is positively associated with the price of protection against the parent’s default risk. The incremental usefulness of parent-only leverage is more pronounced when the parent does not guarantee the subsidiaries’ debt and when the internal capital market within the consolidated reporting entity is weak. Our findings suggest that supplementing consolidated financial statements with parent-only financial statements may better serve debt holders’ information needs.

Sovereign-Bank Diabolic Loop: The Government 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.

Not All Shocks are Created Equal: Assessing Heterogeneity in the Bank Lending Channel

We provide evidence that the strength of the bank lending channel varies considerably across three major events in the European sovereign debt crisis - the Greek debt restructuring (PSI), outright monetary transactions (OMT), and quantitative easing (QE). We study how lending responds to each shock using detailed bank, firm, and household data from Portugal, a country that was directly exposed to the three events. While the price of sovereign debt securities increased in all three events, banks reduced sovereign debt holdings and realized accumulated capital gains only after QE. As a result, lending to final borrowers reacted more strongly to QE than to the PSI or OMT events. Our results suggest that asset purchases were more effective than signalling events at stimulating the bank lending channel. JEL Classification: E52, E58, G18, G21

The Transformation of Debt: The Paper State and Paper Economy in Early America

Debt underpins the modern global economy. Debt is also intimately tied to the function and form of the modern state. As a form of capital, debt is a combination of several legal modules and legal qualities that allow holders of debt to secure a future pecuniary return. The development of these legal modules and legal qualities may be observed in the emerging commercial society of the United States of America in the late eighteenth and early nineteenth century. By tracing the transformation of debt over this time period in the USA, we may gain insight into how debt, the economy, and the state could be re-envisioned for the future.

Companies as Commodities

Like copper, corn, or crude oil, companies increasingly trade like commodities. Some investors — certain holders of debt, activist shareholders, and controlling shareholders, especially private equity funds — are focused solely on returns. In practice, this means that they care about the fate of the companies in which they invest no more than they care about the fate of any tonne of copper, bushel of corn, or oil barrel they happen to trade. These investors are so immune to reputational concerns that they will even prefer that the companies in which they invest fail if failure maximizes their return on investment. This Article identifies and labels these “going-concern-neutral” (GCN) investors. By virtue of their singular focus on return on investment, GCN investors are not bound by the same norms and relationships as other stake-holders in a company. This disconnect allows GCN investors to transfer an out sized share of company value to themselves. As a result, GCN investing typically increases the costs and risk faced by other stakeholders. This Article then uses property theory to understand GCN investing and the conflicts in the use of company value that it creates. Although it is contested whether GCN investors are properly understood as true owners of firms and their assets, accepting that premise to leverage the tools of property theory leads to significant insights. Analyzing these investors’ ownership claims through an exclusion framework reveals unseen nuances in the relationships between GCN investors and other stakeholders. Next, four property-law concepts — the right to destroy, waste, nuisance, and the tragedy of the commons — provide a rich source of analogies. These analogies reveal that the law has long used a number of so-called governance rules to manage property where there are several competing users. These rules restrict the rights of owners in order to address externalities and to promote welfare maximization. Although companies have been commoditized into mere property, the governance rules that restrict property ownership in other contexts do not yet apply to ownership of companies. It is time to consider interventions that would align the benefits and burdens of ownership of commoditized companies with ownership of other as-sets.

From stress testing to systemic stress testing: The importance of macroprudential regulation

Stability of the banking system and macroprudential regulation are essential for healthy economic growth. In this paper we study the European bank network and its vulnerability to stressing different bank assets. The importance of macroprudential 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 both asset risk and bank response to a shock beyond which the system transitions from stable to unstable.

Debt Covenants and the Value of Commitment

In a dynamic setup, the value of a capital structure policy for a firm depends on shareholders’ commitment. We analyze whether debt covenants can be com- mitment devices and their disciplinary effect on firm policies. While renegotiation following covenant violations allows for debt holders’ control and improves the ex post firm value, it weakens commitment on leverage policies and leads to ex ante firm value losses similar to those under no covenants, as well as a rigid debt issuance policy which is unable to respond to productivity shocks. Therefore, frictions that hinder ex post renegotiation are crucial for covenants to be commitment devices. Under commitment, covenants that discipline the leverage improve firm value the most because they restore the flexibility of debt policy. Instead, covenants de- signed to deliver ex post debt protections, like debt and asset sweeps, are less efficient, as they do not affect the dynamics of leverage. An efficient covenant also has a positive effect on investments.