Bank Debt Research Articles

Investor Demands for Safety, Bank Capital, and Liquidity Measurement

We construct a model of a bank's optimal funding choice, where the bank negotiates with both safety-driven short-term bondholders and (mostly) risk-taking long-term bondholders. We establish that investor demands for safety create a negative relationship between the bank's capital choices and short-term funding, as well as negative relationships between capital and common measures of bank liquidity. Consistent with our model, our bank-level empirical analysis of these capital-liquidity tradeoffs show (1) that bank liquidity measures have a strong and negative relationship to its capital ratio for both large and small banks, and (2) that this relationship has weakened with the advent of stronger liquidity regulation. Our results suggest that the safety concerns of bank debt investors may underlie capital-liquidity tradeoffs and that a bank's share of collateralized short-term debt may be a more robust measure of bank liquidity.

What affects bank debt rejections? Bank lending conditions for UK SMEs

Using the UK SMEs Finance Monitor data over 2011–2017, we explore the determinants of bank debt rejections for UK SMEs. In the wake of the global financial crisis, business overdrafts and term loans show slightly different trends although the factors affecting rejections are similar. We find that since 2014 rejection rates reduced for both facilities and they remained stable in the run-up to the Brexit referendum and its immediate aftermath, although export and import SMEs operating in industries with a high share of EU trade experienced tighter conditions. Further, we present robust evidence that firms with female owners, organised in partnerships, and with a higher initial credit balance are more likely to have their credit application approved. Finally, younger, smaller and more innovative SMEs are more likely to be rejected, while their chance of being successful in their credit applications increases substantially after 2014.

The effect of auditor litigation risk on clients' access to bank debt: Evidence from a quasi-experiment

We exploit staggered state-level shocks to third-party auditor legal liability in the U.S. to test whether auditor litigation risk affects client companies' access to private debt markets. We find that an exogenous increase in auditor litigation risk leads to an increase in both clients' likelihood of receiving bank loans and the average amount of the bank loans that clients receive. In support of our proposed mechanism that auditor litigation risk leads to improvements in clients' audit and financial reporting quality, we find that these same shocks lead to a reduction in accruals, an increase in going-concern opinions, a decrease in restatements, and an improvement in accruals' ability to predict future cash flows. We also find that increased auditor litigation risk leads to an increase in the contractibility of clients’ accounting numbers, as proxied by the use of debt covenants, and a decrease in the cost of borrowing.

The Effect of Auditor Litigation Risk on Client Access to Bank Debt: Evidence from a Quasi-Experiment

We exploit staggered state-level shocks to third-party auditor legal liability in the U.S. to test whether auditor litigation risk affects client companies’ access to private debt markets. We find that an exogenous increase in auditor litigation risk leads to an increase in both clients’ likelihood of receiving bank loans and the average amount of the bank loans that clients receive. In support of our proposed mechanism that auditor litigation risk leads to improvements in clients’ audit and financial reporting quality, we find that these same shocks lead to a reduction in accruals, an increase in going-concern opinions, a decrease in restatements, and an improvement in accruals’ ability to predict future cash flows. We also find that increased auditor litigation risk leads to an increase in the contractibility of clients’ accounting numbers, as proxied by the use of debt covenants, and a decrease in the cost of borrowing.

CEO Optimism and the Cost of Bank Debt

AbstractThis paper examines the effect of the level of CEO optimism on loan spread and number of covenants using 4869 loan facilities (tranches) made to 1271 U.S. industrial firms over the period 1992–2011. We find that banks charge significantly lower spreads and impose a smaller number of covenants on loans made to firms with moderately optimistic CEOs. However, banks tend to charge higher costs on loans made to firms with low‐ or high‐optimism CEOs. The results suggest that the level of CEO optimism and the costs of bank loans have a convex relation.

The role of macroeconomic factors in the capital structure of European firms: How influential is bank debt?

Based on a partial target adjustment model and the trade-off theory, this paper investigates whether the influence of macroeconomic variables of monetary policy on corporate leverage is shaped by the nature of borrowing, and more specifically by the presence of bank debt. Given the importance of banking institutions as transmitters of monetary policy, we argue that this source of debt might play a critical role in capital structure behaviour. In addition, as banking relationships are more informative and flexible, bank debt is likely to soften the effects of the economic cycle. Using a sample of European countries from 2004 to 2015, our evidence reveals that bank debt modifies the impact which macroeconomic variables of monetary policy have on a firm’s leverage. By comparing crisis and non-crisis periods, our results also show a more stable influence of said variables over the business cycle on bank debt than on non-bank debt.

Proprietary information and the cost of bank debt

PurposeThis study explores how the firm’s proprietary information has an impact on the bank loan contracts. It explains the propensity of using the competitive bid option (CBO) in the syndicate loans to solicit the best bid for innovative firms and how it changes based on industry competition and the degree of innovations. This research also examines how the interstate banking deregulation (Interstate Banking and Branching Efficiency Act) in 1994 affected the private loan contracts for innovative borrowers.Design/methodology/approachThe study uses various econometric analyses. First, it uses the propensity score matching analysis to see the impact of patents on pricing terms. Second, it uses the two-stage least square (2SLS) analysis by implementing the litigation and non-NYSE variables. Finally, it studies the impact of the policy change of the Interstate Banking and Branching Efficiency Act of 1994 on the bank loan contracts.FindingsFirms with more proprietary information pays more annual facility fees but less other fees. The patents are the primary determinants of the usage of CBO in the syndicate loans to solicit the best bid. While innovative firms can have better contract conditions by the CBO, firms with more proprietary information will less likely to use the CBO option to minimize the leakage of private information and the severe monitoring from the banks. Finally, more proprietary information lowered the loan spread for firms dependent on the external capital after the interstate banking deregulation.Originality/valueThe findings of this research will help senior executives with responsibility for financing their innovative projects. In addition, these findings should prove helpful for the lawmakers to boost economies.

In Too-Big-To-Fail We Trust: Ethics and Banking in the Era of COVID-19

The COVID-19 economic crisis has brought to light something very broken in the American banking system—banks prioritize their own profits over the interests of those they serve and interests of social justice. And they are permitted to do so because they do not owe a fiduciary duty to their customers and are not social welfare maximizing entities.In an effort to support the economy, the US government passed numerous stimulus acts, which included, among other things, a Paycheck Protection Program (PPP), and the distribution of relief checks to consumers. To effectuate the massive distribution of liquidity on an expedited basis, the government relied on big banks. But instead of prioritizing the public welfare, the banks were focused on their bottom lines and thus did not carry out the true intent of the stimulus. For example, with respect to the PPP, although the Small Business Administration was required to process the loans on a first-come, first-served basis, the banks were not. And absent that requirement, the banks prioritized richer and bigger customers. As a result, women and minority-owned small businesses, as well as peripheral area-based small businesses, found themselves facing more barriers to getting loans. Similarly, with respect to the direct distribution of relief checks to consumers, banks prioritized their own interests over those of their customers. For example, in an effort to collect bank debt, banks froze and seized the funds from government relief checks deposited into consumer accounts before the consumers that needed those funds received them. Consequently, various state attorney generals and courts had to intervene, and mandate that the consumers be permitted to use the funds as the government had intended—for necessities like food and shelter.There are several techniques we can employ to modify banks’ ethical behavior and cultural norms. This Essay discusses such methods, which include (i) a top-down regulatory approach; (ii) the creation of market-led initiatives; (iii) an interpretive fix, offered by the judicial system; and (iv) a public criticism and shaming semi-regulatory approach.

Liquidity and Consumption: Evidence from Three Post-Earthquake Reconstruction Programs in Italy

In Italian regions hit by earthquakes, homeowners typically receive public funds to finance reconstruction. While these funds are strictly tied to reconstruction work, they are in part disbursed up front, leading to significant variation in cash on hand. We exploit this variation to study the effects of liquidity on relatively wealthy households’ consumption. We find a large and significant response in the first year that homeowners receive the cash and provide evidence that this response is driven by illiquid households with bank debt. Instead, we find no evidence that consumption responds to funds paid directly to firms, thus leaving households’ liquidity unaffected. (JEL E21, G51, H76, Q54, R31)

Factors Affecting Bad Debt in the Vietnam Commercial Banks

The paper examines the factors affecting bad debts of Vietnamese commercial banks in the period of 2012-2018. On the basis of theory and previous empirical studies on the factors affecting NPLs, in combination with the use of GMM method, the author has built a model of eight variables affecting NPLs. However, the research results show that there are five variables affecting bad debt. Statistically significant variables are business performance, bank size, credit growth, gross domestic product growth and inflation rate. The final estimation model is effective because the defects have been tested so there is not any deficiencies in the model. Based on the research results, the author proposes a number of related recommendations to manage and control bad debts and improve business performance of Vietnamese commercial banks.

Asset redeployability and the choice between bank debt and public debt

A firm with less redeployable assets, which are assets that have fewer alternative uses outside the firm, is more likely to borrow from banks than issue public debt. These findings are consistent with firms with less redeployable assets valuing the ability to renegotiate bank debt contracts instead of selling assets in the event of default. Consistent with this mechanism, firms with lower asset redeployability sell fewer assets following covenant violations. Our results contribute to work on the determinants of which debt markets a firm chooses to borrow from and the role that banks play as intermediaries.

Financial and Real Effects of Government Monitoring: Evidence From Commercial Bank Loans

I use a 2009 redesign of the Ecuadorian government's corporate tax auditing to document that tax enforcement affects firms' cost of capital and real decisions in settings where agency frictions constrain lending. Firms included in a group that was disproportionately monitored, i.e., audited annually by the Ecuadorian tax authority, accessed significantly cheaper new bank debt despite paying more taxes. Additionally, monitored firms increased their investments in human and physical capital. I use a regression discontinuity design to control for selection bias in their decision about which firms to monitor. Finally, I provide evidence that tax enforcement reduces agency frictions between the firm and its lenders, which is reflected in the lower interest rate on new debt. The implications are that (1) credible tax enforcement by the government can play a corporate governance role, and, (2) tax enforcement is an effective and fiscally positive way to stimulate firm investment where agency frictions constrain lending.

The effects of Corporate Governance, Audit Quality, and Conservatism on Loan Collateral Requirements

In competitive credit markets, borrowers and lenders have equal information on default risks. Under these circumstances, loan collateral are less important in credit decision-making. But in emerging credit market, like Indonesia, borrowers and lenders do not possess equal information on firms’ future prospect, making use of collateral in mitigating default risk have become common practice. Despite strong theoretical support for the use of collateral to protect lenders from default risk, excessive protection may have a negative effect on the debt markets. However, some Indonesian firms are not required to provide collateral for bank debts. This study examines the effect of Board of Commissioners independence, governance committees, audit quality, and conservatism on the likelihood of using loan collateral. Using slovin formula, as much as 785 firm listed in Indonesia Stock Exchange were collected during sample period of 2012-2015. Logistic regression analysis suggest that firms with higher Board of Commissioners independence, having separate governance committee, hire Big 4 auditors, apply conservative accounting policies are less likely to provide loan collateral.

Simultaneous Occurrence of Banking Debt and Currency Crises (Triple Crises) in Iranian Economy and Its Determining Factors During the Period 1980-2017

Simultaneous Occurrence of Banking Debt and Currency Crises (Triple Crises) in Iranian Economy and Its Determining Factors During the Period 1980-2017

DOES INITIAL ACCESS TO BANK LOANS PREDICT START‐UPS' FUTURE DEFAULT PROBABILITY? EVIDENCE FROM ITALY

In Europe, several countries have established public loan guarantee funds throughout direct/indirect loan programs to facilitate the access of SMEs and start‐ups to bank credit. This paper investigates whether start‐ups' level of access to bank loans during the early stage represents an imprinting factor with effects on the likelihood of survival once the firm reaches maturity. We rely on a firm‐level longitudinal data set of 49,111 Italian startups born from 2003 to 2005. Implementing a 2SLS regression analysis we show that the initial level of start‐up bank debt negatively influences the probability of default controlling for firm characteristics and performance. (JEL G21, M20, H32)

Organizational Forms and the Contracts of Bank Loans

This paper is the first to consider all three important organizational forms, such as industrial diversification, global diversification, and geographic dispersion, in the empirical framework to find out which types of diversification do matter for the contracting of bank loans. I find that, on average, globally diversified firms could incur a 7.7% to 14.5% additional increase in loan pricing compared to the concentrated firms or the firms that are not diversified at any dimension. The other types of firms incurring a higher cost of bank debt are the firms that are only geographically dispersed, and the firms that are diversified in all three forms. Examining the effects of organizational forms on the non-price loan terms, I observe that covenant restrictions are generally higher for the geographically dispersed firms that are either industrially or globally diversified.

Financial Crisis Effect on Latin American Companies’ Debts

Purpose: This study aims to verify changes in the debt structure of companies in the main Latin American countries. Approach/Methodology/Design: A difference-in-differences test is applied in a sample of 520 publicly-traded and closed companies, whose data are collected in the previous (2003-2007) and subsequent (2008-2012) periods of the crisis. Findings: The results include the replacement of bank debts by private and public non-bank debts, reduction of maturity of debts and relevance of better level of governance or regulatory environment of countries in guaranteeing the rights of creditors in this process. Practical Implications: These results are in line with the countercyclical fiscal policy adopted by these countries, guaranteeing them greater credibility in international markets. Social Implications: This study also suggest questions for future research. Each Latin American country faces many problems that are motivated by diverse events - political, for example - that impact the economy. That task involves the broadening of this methodology to incorporate internal shocks as well as global crisis. Originality/Value: One of the principal contributions of this study is the finding that companies in the main Latin American countries replace their banking credit by utilizing non-banks, just as done by the developed countries. Understanding better this effect of the global financial crisis may lead to helpful permanent macroeconomic and microeconomic measures.

Determinants of Audit Sanctions Severity

This study investigates the effects of material weaknesses from auditing standards and of material misstatement from accounting standards on the audit sanctions severity. Using a unique database in the period 1983 – 2015, we find mixed results. Among the auditing standards, Internal Control Weaknesses lead to more severe audit sanctions than Quality Control, Other Auditors, Reporting and Audit Opinion Material Weaknesses Audit Sanctions, and to less severe audit sanctions than Professional Skepticism and Substantial Procedures. Among accounting standards, Fair Value misstatements are associated with more severe audit sanctions than Long-term investment, bank debts, and liquidity errors, and with lower severity of audit sanctions than Account receivables. Taken together, these findings suggest two main determinants of audit sanctions severity that auditors and accountants need to be aware: the area of internal control deficiencies and the area of fair value measurement. From these results, we learn that accounting and auditing standards errors have different likelihood of audit sanctions, and that auditors that aim to avoid sanctions need to invest mainly in the internal control assurance and in the fair value items of the financial reporting.

Does geopolitical uncertainty affect corporate financing? Evidence from MIDAS regression

This paper investigates the effect of geopolitical uncertainty on (market) leverage ratio, debt maturity, and choice of debt source. Using a new monthly index of geopolitical uncertainty and annual data for corporate financing variables, we find that under geopolitical uncertainty firms tend to reduce debt and increase market leverage. We argue that this increase is driven by asymmetrical reductions in the numerator (total debt) and the denominator (total debt and equity) of the leverage ratio. Under geopolitical uncertainty, firms tend to shorten their debt maturity structure and—especially those firms with lower credit quality—to substitute bank debt for public debt.

Effect of corporate tax avoidance activities on firm bankruptcy risk

Corporate tax avoidance has been shown to raise the cost of bank debt and lower credit and bond ratings. However, it is unclear whether tax avoidance actually increases a firm’s bankruptcy risk or whether it is just viewed negatively by banks and rating agencies. We find that firms engaging in tax avoidance and firms that are thinly capitalized face higher bankruptcy risk. To account for endogeneity and functional form misspecification, we verify our results using instrumental variable and propensity score matching methods. Our findings are consistent with the view that tax avoidance is a risk-enhancing activity.