Debt Holders Research Articles

Effects of the international regulatory reforms over market liquidity of Mexican sovereign debt

In this paper we document empirical evidence regarding the unintended consequences of financial regulatory changes on market liquidity of Mexican sovereign debt. We find mixed impacts: in the context of Basel 2.5, Basel III and the Liquidity Coverage Ratio, we find negative effects, while in the case of the Dodd-Frank Act and the Volcker Rule we find positive effects. The difference in results can be explained by the fact that some of the regulatory changes mainly imposed additional constraints on government debt holdings, while others were designed to enhance transparency and thus reduce uncertainty as well as information asymmetries. Moreover, our estimates suggest that the aggregate effect of the regulatory changes decreased the weekly turnover ratio of Mexican sovereign debt securities by 18 percent. Our results hold under different liquidity measures and different econometric specifications.

Systemic Stress Test Model in Shared Portfolio Networks

We propose a dynamic model for systemic risk using a bipartite network of banks and assets in which the nodes and links may vary over time. We apply the model to the European sovereign debt crisis and observe that the results closely match real-world events (e.g., the high risk of Greek sovereign bonds and the distress of Greek banks). The model could become complementary to existing stress tests, incorporating the systemic risk contribution of banks and assets in time-dependent networks. In addition, the model provides a simple way of assessing the stability of a system by using the ratio of the log-returns of sovereign bonds and the stocks of major sovereign debt holders as a stability indicator. We also propose a systemic importance ranking, BankRank, for the financial institutions analyzed in this study to assess the contribution of individual banks to the overall systemic risk.

Earnings Transparency, Cost of Debt and Cost of Equity: A Cross-Country Examination

This study evaluates the effect of earnings transparency on the cost of debt (Ki) and cost of equity (Ke). Previous literature has demonstrated that earnings transparency can reduce the Ke, especially in very well-developed stock markets. However, our main hypothesis is that this finding does not necessarily remain the same when considering the Ki. More specifically, this is because investors and creditors have different interests, concerns, and views about financial statements and accounting procedures. Using two proxies of earnings transparency, our findings support this conjecture, indicating that while an increase in earnings transparency reduces the Ke, this relationship does not keep that same impact on Ki. This study has implications for standard setters, debt holders and companies regarding the changes stemming from IFRS convergence, contributing to the prior literature which indicate that creditors and investors need different kind of information due to the distinct decision-making process.

Nonresident holdings of domestic debt in Nigeria: Internal or external driven?

AbstractThis paper studies the drivers of nonresident holdings of local currency debt in Nigeria. Using data over 2007M1–2019M1, we show that, on average, global factors (global interest rates, oil prices) seem to carry more weight than domestic factors (treasury bills rate and domestic risk) in foreign portfolio investors’ decisions in Nigeria. Specifically, we show that foreign participation is, in the long run, positively correlated with oil prices and profitable rates of return on local‐currency instruments, but negatively correlated with exchange rate depreciation pressures. In the short run, oil prices, opportunity cost of funds and perception of Nigeria‐specific risks also play a role. These results highlight the volatile short‐term nature of such flows and call for a package of policy reforms to attract longer‐term direct investments.

Taming the Paper Tiger: Deterring Chinese Economic Cyber Espionage and Remediating Damage to U.S. Interests Caused by Such Attacks

The U.S. faces an increasingly complicated set of national security and economic threats. Chief among these are: (1) increasingly sophisticated and damaging cyber-attacks that threaten national security; harm government institutions, for-profit enterprises (including defense contractors), and institutions of higher learning; and undermine the country’s system of property rights; and (2) rising levels of national debt held by foreign competitors. China poses the greatest threat in both regards. China’s government carries out, organizes, and/or facilitates cyber-attacks to misappropriate intellectual property with serious consequences to the U.S.’s national security and economy. China also has acquired significant holdings in U.S. government issued debt instruments. Mounting U.S. government debt restricts annual federal government budgetary decisions, negatively affects the U.S.’s international standing as a borrower, and threatens national security by giving foreign debt holders, such as China, potential leverage in foreign relations negotiations. No policy prescription to date has achieved meaningful and lasting success in addressing these threats, and there are indications the threats are only worsening. The National Trade Secret Protection and Remedy Strategy (“NTSPS”) policy prescription proposed by this Article addresses the cyber attack and federal debt threats in a way that links and transforms them from vulnerabilities into leverage to protect the U.S.’s national security, system of property rights, and future economic well-being. Specifically, the U.S. government should pursue trade secret theft-related litigation and remedies against the Chinese government and its surrogates in U.S. federal courts. The proposed NTSPS would: (a) create a specific, limited government property interest in intellectual property developed under government defense contracts; (b) create extra-territorial jurisdiction for the U.S. government and personal jurisdiction over foreign nations that engage in trade secret misappropriation either directly, or indirectly through state-supported or enabled entities or persons; and (c) provide for ready availability of pre-judgment remedies, such as attachment and liens to secure the government’s remedy, and satisfaction of judgement through execution on U.S. debt held instruments held by the mis-appropriator — in this case, China. Successful implementation of the NTSPS would require amendments to several existing federal statutes and defense contracting regulations and procedures. Implementing the NTSPS strategy will allow the U.S. federal government to: (1) compensate itself and U.S.-based companies for the damages each has suffered as the result of Chinese-led or sponsored cyber-attacks; (2) deter future Chinese cyber-attacks by conveying a strong message that the U.S. will take meaningful action in response to said attacks; (3) slow the advancement of Chinese military technology by forcing China to internalize the significant research and development expenses incurred by the U.S. to develop the technological capabilities often targeted by cyber espionage initiatives; (4) significantly reduce U.S. debt and consequently the restrictions and burdens it places on the U.S. economy and national defense capability; and (5) pare down the financial leverage China holds over the U.S. in foreign relations.

Approaching Monetary Integration in the Context of the Imperative to Ensure the Sustainable Growth in the EU

Sustainable economic growth is an essential objective at the European Union level. The purpose of this paper is to investigate the impact of monetary integration on economic growth, assuming that the introduction of the euro significantly stimulated the process of European financial integration. We used a fixed-effects methodology for panel data for the EU 28 countries for the period 2004–2018. We find that the main factors through which monetary integration contributessignificantly and positively to economic growth areeconomic growth Single Euro Payments Area (SEPA)cards, trade, monetary freedom, convergence of interest rates, convergence of exchange rates and cross-border holdings of short-term debt, with significant differences between Eurozone and non-euro countries, which confirms the hypothesis that the introduction of the euro had a significant impact on economic and financial integration.

Internationalization and firm default risk: The roles of environmental dynamism and marketing capability

Internationalization's role on firm performance has captured massive research attention. However, its influence on firms' default risk, an important firm outcome that not only reflects the backward-looking firm managerial effectiveness but also signifies the forward-looking willingness-to-support from key stakeholders such as debt holders, is not found in the literature. This current research is developed to fill this important theoretical gap by formulating a moderating model that simultaneously incorporates internationalization, environmental dynamism, and marketing capability towards their dynamic joint effects on global firms' default vulnerability, and thus it generates more detailed and realistic images of internationalization under the influences of concurrent internal and external contingency factors. Our results show that high marketing capability assists firms that have a high degree of global expansion to reduce default risk. In addition, environmental dynamism can be either a facilitator or hindrance for internationalization's risk reduction, depending on firm capability levels.

CEO inside debt holdings and CSR activities

This paper examines how CEO inside debt holdings affect firms’ corporate social responsibility (CSR) activities. Using the US firm-level data over the 2006–2015 period, we find that firms with high CEO pensions and deferred compensation engage more in CSR. This positive relationship however is weakened for firms with greater CEO stock options. We further show that CEO inside debt holdings have a larger impact on CSR for firms in controversial industries where CSR is crucial for risk mitigation. Our results suggest that CEOs with higher inside debt holdings are less likely to take risks, thereby engaging in more CSR.

Expanding the conceptual domain of governance in franchising

We propose a model that expands the conceptualization of governance in franchising that acknowledges traditionally ignored stakeholders, including debt and equity holders. Though research has examined how equity holders benefit from the organizational form of franchising, it has not examined the specific role that equity or debt holders play in governing franchise organizations. Additionally, the unique ontology of franchising, which includes semi-internal members of the organization (i.e., franchisees) that invest their own assets and maintain their own balance sheets, provides a rich context for exploring such governance issues. Franchisees exist outside traditional firm boundaries and are not employees, but they are closely linked to the brand given their significant investments in firm-specific assets. Franchisee-based organizations also are growing their own corporate structures and investments in firm-specific assets, sometimes dwarfing those of their franchisor partners. By expanding the concept of governance in franchising, we open avenues for significant scholarship that can enrich both the governance and franchising literatures. We provide several preliminary propositions and constructs to help encourage new research in this emerging arena of franchising research.

Institutional Debt Holdings and Governance

Using data on the universe of US-based mutual funds, we find that two out of five fund families hold corporate bonds of firms in which they also own an equity stake. We show that the greater the fraction of debt a fund family holds in a given firm, the greater its propensity to vote in line with the interests of firm debt holders at shareholder meetings. Voting has direct policy consequences as firms that receive more votes in favor of creditors make corporate decisions more in line with the interests of debt holders.

What's good for you is good for me: The effect of CEO inside debt on the cost of equity

We find an overall negative relation between CEO inside debt holdings and the cost of equity capital. Such a negative relation holds in an instrumental-variable analysis, a test using changes in variables due to CEO turnover events, a test using seasoned equity offering (SEO) underpricing as an alternate cost of equity measure, and a difference-in-differences test based on the implementation of Internal Revenue Code Section 409A Final Regulations. Additionally, the negative relation between inside debt and the cost of equity capital is nonlinear, suggesting the existence of optimal inside debt compensation that can minimize cost of capital. The negative relation is less pronounced in firms with pre-funded executive pension plans and in firms that provide executives with the pension lump-sum option. We also provide evidence that inside debt lowers the cost of equity more for excessively levered firms. Collectively, these findings suggest that shareholders value the beneficial role of CEO debt-like compensation in constraining excessive managerial risk taking.

Liquidity in Resolution - A Transatlantic Perspective on Lender of Last Resort Operations in Bank Resolutions

This Article argues that the frameworks put in place to allow for the orderly resolution of large financial institutions suffer from a liquidity problem. This is because post-crisis reforms enjoined central banks from providing liquidity to financial firms during and immediately after resolution. By creating a bright line rule, which essentially prohibited lender-of-last-resort (LOLR) operations once a firm enters resolution proceedings, there is a risk that short-term debt can no longer be rolled over, thereby increasing financial stability risks. As this Article shows, however, there are important differences between the United States (U.S.) and Europe. While the U.S. Congress at least sought to minimize liquidity gaps in resolution by throwing the fiscal firepower of the U.S.’s in the ring, European lawmakers failed to agree on a genuine, common backstop for the resolution of significant credit institutions, only leaving a small window for national solutions. To ensure that the core objectives of resolution, which include allocating losses to equity and long-term debt holders rather than to taxpayers, the central bank should be given a limited LOLR role to shore up the resolved firm’s funding. This LOLR function ought to be guaranteed by the fiscal authority, subject to ex-ante volume limits, and provide only short-term credit. Moreover, to further mitigate latent moral hazard risks and to create a counterweight to the extended LOLR function, the Article advocates for higher capital requirements.

Depositor Characteristics and the Performance of Islamic Banks

We investigate the reasons for the growing demand for Islamic banking internationally, and examine the relative economic performance of Islamic banks compared with conventional banks in managing their capital buffers and liquidity. Using data for the period 2000–2012 for 104 Islamic and 619 conventional listed and non-listed banks spread across 22 countries with both these types of banks, and using standard statistical methodology for archival data analysis, we find that religious, political, and socio-legal factors, rather than economics alone, play key roles for Islamic banks in attracting depositors. Governed by Islamic ( Shariah) laws, these banks cannot lend money and charge interest. Depositors are not debt holders as in conventional banks, but investment partners that share in the risk, or profit-loss sharing (PLS), with the bank. As Islamic banks have no debt holders, and depositors self-select to bank with Islamic banks, economic theory suggests a reduced need for excessive (less productive) liquidity buffers. However, we find that Islamic banks maintain significantly higher liquidity buffers than their conventional counterparts. A main contribution of our study is to highlight the fact that standard economic measures alone may be inadequate to assess the performance of Islamic banks.

Crisis y fragilidad financiera griega bajo la hipótesis de inestabilidad de Minsky

Greece has still not found its way back while its economy has been deteriorating year after year since 2008. It is argued in this article that the central factor of this outcome was the dynamics of financing in the countries most involved in Greek indebtedness that was considerably greater and had a more detrimental influence on the Greek economy than poor fiscal management that different governments could incur. The impetus displayed by financial services did not correspond to the weakness of the real sector which occurs when borrowing and financial flows are used without restriction to meet the interests of creditors. In this work an analysis of the channels that fueled Greek debt is carried out in the context proposed by Minsky where an economy moves from financial stability to a scenario of instability supported in two determining variables: high and exaggerated interest on debt service and the type of agents holding debt assets. The debt-service interest incurred by the government since joining the eurozone and the impetus for financing caused the debt to have a giant snowball effect while the change in debt holders forced the government to comply with strict and onerous government and macroeconomic reforms that directly impacted the ability of Greek governments to pay with negative results on the well-being of society.

Does it pay off? Integrated reporting and cost of debt: European evidence

AbstractAlthough the <IR> (Integrated Reporting) Framework defines providers of financial capital as both equity and debt holders, there is a distinct lack of research on the association between IR and debt. This study is the first to examine the effect of the voluntary preparation of an integrated report on the marginal cost of public debt. From an agency theoretical standpoint, we assume that IR decreases information asymmetries, facilitates lenders' assessments of a firm's risk of default, and thus is negatively related to a firm's cost of public debt. On the basis of a European sample, consisting of 2,196 firm‐year observations between 2015 and 2017, we find that IR significantly decreases a firm's cost of debt. In subsequent moderation analyses, the results reveal that this effect (a) is stronger for firms with lower ESG performance and (b) holds only for firms operating in environmentally sensitive industries. The results are robust to a battery of statistical models. We expand on earlier empirical literature on IR and provide valuable implications for research, practice, and standard setting.

Non-Resident Holdings of Domestic Debt in Nigeria

Foreign holdings of domestic debt instruments in Nigeria have been increasing. Using data over 2007M1-2019M1, we show that, on average, global factors (global interest rates, oil prices) seem to carry more weight than domestic factors (treasury bills rate and domestic risk) in foreign portfolio invetsors’ decisions in Nigeria. Specifically, we show that foreign participation is, in the long run, positively correlated with oil prices and profitable rates of return on local-currency instruments, but negatively correlated with exchange rate depreciation pressures. In the short run, oil prices, opportunity cost of funds and perception of Nigeria-specific risks also play a role. These results highlight the volatile short-term nature of such flows and call for a package of policy reforms to attract longer term direct investments.

What Determines the Selection of Public Accounting Firms? Case of Listed Mining Companies in Indonesia

Objective – This study aims to determine the effect of institutional ownership, managerial ownership, board size and debt on the selection of public accounting firms in mining sector companies listed on the Indonesia Stock Exchange (IDX). Design/methodology – This study uses big four and non-big four public accounting firms classification as a proxy of the quality of the firm that will be selected by the company. It utilizes 120 observations during the 2015-2017 period. The analysis technique used is logistic regression. Results – The results showed that the size of the board of commissioners affected the election of qualified public accountant. While institutional ownership, managerial and debt holdings have no effect on the selection of qualified public accounting firms.

Assessing working capital management efficiency of Indian manufacturing exporters

PurposeThe purpose of this paper is to empirically investigate the relationship between working capital management (WCM) efficiency and exogenous variables of the Indian manufacturing sector along with its sub-industries that are involved in export activities.Design/methodology/approachPanel regression (fixed effects) was used on a sample of 563 Indian manufacturing firms involved in export activities, covering a time period from 2008 to 2018.FindingsIndustry-wise results showed a significant relation of leverage, net fixed asset ratio, profitability, asset turnover ratio, total asset growth rate and productivity with cash conversion cycle (CCC).Research limitations/implicationsFirstly, having taken a sample from a developing economy, the results of our study may be generalizable only among developing contexts. Secondly, the time period taken in this study (2008–2018) has witnessed several economic fluctuations such as recession and demonetization which might differ for the firms or countries in normal conditions.Practical implicationsAn improved working capital model could advance the firms' performance by reducing the CCC of the firm, thereby creating efficiency in WCM. In addition, the results of this study could be helpful for many stakeholders such as working capital managers, debt holders, investors, financial consultants and others for monitoring the firms.Originality/valueThis study contributes to the existing literature in the relation between WCM efficiency and exogenous variables of the Indian manufacturing firms engaged in the export activities. Moreover, this study is one of the few research studies to investigate this relationship among Indian export firms in different industries, thus filling the gap in similar work done in other countries.

Leverage Dynamics Under Segmented Equity and Debt Markets

We study a continuous-time dynamic capital structure model in which a firm can continuously adjust its capital structure. Unlike previous models, we assume heterogeneous equity and debt holders and segmented equity and debt markets. We show that the expected future equity and debt market returns, but not realized market returns, affect the firm's debt issuance policy and speed of leverage adjustment. The effect is stronger for firms with larger asset beta. We empirically test and confirm our model predictions.

Corporate Governance and the Cost of Debt: Evidence From Food and Beverage Companies in Nigeria

In the corporate world, different business players have a divergent and often conflicting interest; shareholders, for instance, are interested in dividend or capital gain, managers want to implement a policy that maximizes their self-interest while debt holders are interested in favorable interest on capital. The study focused on the effect of corporate governance on the cost of dent of listed food and beverage companies in Nigeria from 2008 to 2017 amidst these divergent interests. The study used an ex post facto research design while multiple regression involving fixed effect was used to analyze the secondary data obtained from the annual financial reports of the selected six food and beverage companies. The study found significant positive effects of board size and board independence on the cost of debt while the director’s remuneration exerts negative but no significant effect on the cost of debt. Leverage as a control variable for the study was also found to have no significant negative influence on the cost of debt. The study, therefore, concludes that corporate governance has a significant joint effect on the cost of debt of listed food and beverage companies in Nigeria. The main recommendation of the study is that board size and composition should be structured and tailored towards sending a good signal to debt holders in the form of quality financial reporting in a bid to reduce the cost of debt to maximise shareholders’ wealth.