Excessive Debt Research Articles

PRICE RELATIONSHIPS BETWEEN BOND MARKETS

Introduction. The strengthening of globalization processes leads to a greater integration of the domestic financial market into the global financial market, especially bond market. Ukraine is under significant influence of world economic processes. In this context the impact that has on the state of the domestic market of Ukraine our financial market, as well as the actions of American financial regulators. On the background of the formation of excessive debt structure of the global financial market, including the US market, the financial market of Ukraine in recent time, there is also the nature of the debt market which is a key financial instrument is bonds, i.e. government bonds. Not less important and of the dual influence of the two basic segments of the financial market between market shares and bonds that affects the efficiencyof capital investors. The purposeis the research of the relationships that are formed between the markets of shares and bonds on the example of financial markets of the USA and Ukraine. Results. The price relationship between the bond markets of countries with different levels of development has been considered. For the basic indicators, characterizing the main parameters of the bond market the analysis of the influence of the US bond market to the domestic market, determined correlations between the rates of return on ten-year bonds. It has been established that the time series of the rate on ten-year bonds have signs of nonstationarity. Based on the identified nonstationarity time series were analyzed for cointegration. It is determined that the modeling-level rate bonds in Ukraine can be improved by applying advanced Sapsan the value of the rate of the bonds in the United States. Conclusions. The results do not indicate the manifestation of a dependence between the value of the rates of ten-year bonds in the United States and Ukraine. Also there is no dependence between the current growth rate of bonds. A more detailed analysis also showed the absence of long-term balance between the rates of these bonds. The analysis of the interaction between equity markets and bond between them showed that the existing dual influence should be viewed through the prism of external factors that can lead to very different behavior of these markets, on the one hand they are competitors, in terms of raising capital, on the other in some periods, they are characterized by complementarity.

The Private and Social Value of Capital Structure Commitment

We analyze dynamic stationary models of capital structure, in partial and general equilibrium, when managers cannot commit to firm-value maximization. The model permits us to quantify both the private cost to firms of the commitment problem, and also the aggregate cost of its externality. Our setting encompasses time-varying economic and firm characteristics, as well as valuation under generalized preferences. The model provides an explanation for the procyclical use of unprotected debt: the private costs of non-commitment increase in bad times. Likewise, expropriation incentives rise when firm valuations are low. Hence, without commitment, leverage can be countercyclical. This dynamic amplifies the effect of excess debt on aggregate risk. A range of parameterizations suggests that the social cost of unprotected debt can be large. We present evidence supportive of the prediction that firms with unprotected debt increase their borrowing in bad times.

Capital Structure Management by Share Repurchase for Companies in Emerging Markets

According to foreign research into developed markets, share repurchasing influences the speed of adjustment of companies’ capital structure to the target level. It is worth noting that the number of such research studies for emerging markets is rather small.
 On the basis of an empirical study of a selection of 275 companies from BRICS countries involved in share repurchase for the period of 2005 to 2015 we prove here that share repurchase is an efficient method of correcting an existing capital structure, aligning it to approximate a target level in all BRICS countries. It should be noted that in accordance with our results, companies from Brazil and Russia show the highest speed of adjustment (within 63–80%). This indicates that these companies are able to achieve the target structure within a very short period. Companies from the other countries (India, China, and South Africa) also show a rather high rate of the speed of adjustment (in the range of 44 to 49%).
 It is worth noting that apart from the share repurchase itself, characteristic features of the companies (as well as special characteristics of local economic factors where they are relevant) influence the speed of adjustment to the target capital structure. We also found out that the most significant factors which have positive effects on the speed of adjustment are the company size, its growth prospects, share of repurchased shares, economic growth rate, inflation rate in the country which adversely affect to a great extent the speed of adjustment to the target capital structure. For Russian companies the most significant determinants are the company size, share of repurchased shares and inflation rate.
 An assessment of the speed of adjustment to the target capital structure of companies repurchasing shares showed that for Russian companies (for a balance sheet leverage) and for South African companies (for a market financial leverage) the speed of adjustment is not significant, however in general the countries selection and each sub-selection shows that BRICS countries’ companies are prone to adjust to the target capital structure quicker when the financial leverage is lower than the target value, while companies with an excess debt load optimize much slower.
 On the basis of the research results we offer an algorithm pertaining to capital structure management for the companies acting in emerging markets using share repurchase in an open market.

EBITDA and Managers' Investment and Leverage Choices

ABSTRACTEBITDA is a commonly used performance measure for (i) valuation, (ii) debt contracting, and (iii) executive compensation. The widespread use of EBITDA by stakeholders may induce managers to focus their attention on EBITDA. Since EBITDA excludes various expenses, managers who fixate on EBITDA may underweight the excluded expenses when determining their firms' investments in capital and leverage levels. I find that managers who fixate on EBITDA overinvest in capital and overlever their firm relative to their industry peers. These results are robust to alternative proxies for managers' focus on EBITDA and alternative specifications. I also find that firms whose managers focus on EBITDA have weaker operating performance, which is attributed to higher depreciation expense. My primary proxy for managers' focus on EBITDA is whether they choose to disclose EBITDA in annual earnings announcements. I find that the use of EBITDA in setting executive compensation, the prevalence of EBITDA estimates by analysts, and the use of EBITDA‐based covenants in firms' debt contracts are all positively associated with the propensity to disclose EBITDA in earnings announcements. I find weaker evidence of opportunistic motives explaining EBITDA disclosure. These results are consistent with managers disclosing EBITDA to portray to investors that it is a metric they seek to maximize. Overall, this study suggests that while EBITDA is a widely used metric, there is a systematic cost to using this measure—it provides managers with incentives to overinvest in capital and to acquire excessive debt.

Master's Thesis: Money and the Fiscal Space of Monetarily Sovereign Governments: The Case of Denmark

Since the global financial crisis ten years ago, a mature research programme has developed on the austerity policies imposed, especially in European states, to counter perceived threats from excessive public debt and deficits. While many scholars have criticised austerity for digging the hole deeper, fewer have provided clear alternatives. Yet, the economic school of Modern Money Theory encourages analysis into the operational realities of monetary systems to examine mechanisms, which allow countries with their own currency to spend unhindered. In this paper, the Danish monetary system is analysed to answer to what extent the Danish government is financially constrained and how economic policymaking in Denmark is aligned with the operational realities of the monetary system? First, the two main theories of money, metallism and chartalism, are reviewed to ground the analysis in a monetary ontology in coherence with historical and social scientific proof. The metallist theory conceives money as a market phenomenon, which emerged spontaneously from a money-less barter economy, while states later intervened and compromised the natural monetary system. However, empirical evidence favours chartalism, which takes money as inherently a political phenomenon devised by central authorities to access real resources by levying taxes to be paid in its own unit of account. However, the advent of independent central banking appears to have subjected governments to ‘market discipline’. This puzzle is investigated through a case analysis of the Danish monetary system. Six hypotheses derived from Modern Money Theory guides the analysis into the cooperation between Nationalbanken, the Ministry of Finance and the private banks who hold accounts with Nationalbanken. The monetary system is shown to be quite a closed arrangement, tightly controlled by Nationalbanken in its management of the liquidity in the system. Crucially it is argued that the state’s and Nationalbanken’s balance sheets ought to be viewed in consolidation as one, whereby money is a liability of the Danish government, not an asset to be obtained before spending is possible. The government’s fiscal space is determined by what is for sale in its own currency and not its tax revenues. This consolidated view is substantiated by Nationalbanken’s ongoing activity to establish a benevolent financial environment when the government sells bonds. Yet, Denmark may eventually face domestic constraints due to the self-imposed fixed exchange rate policy, if persistent balance of payment deficits return. Finally, a constructivist case analysis of the ‘Restoration Package’ of 2010 is conducted to highlight how misrepresentation of the government as a currency user, rather than issuer, facilitated the imposition of austerity and fortified a sound finance paradigm. The paradigm was shared by the oppositional coalition and prevented them from later achieving their goal of a strong, equitable recovery.

International Debt Overhang and Monetary Policy: A Simulation Exercise Using Czech Republic Data

We are concerned with the dangers arising from excessive international debt overhang, primarily to financial stability in the debtor country. Assuming that debt forgiveness is not possible, a subject which we modelled earlier relating to the Greek debt crisis, (Goodhart et al. (2018)), we show how an independent monetary policy can be used to smooth consumption for both borrowers and lenders. A counter-cyclical monetary policy can contract liquidity when debt growth is high and expand liquidity when default rates are high. These results are closely related to the policy debate on monetary policy as a macroprudential policy tool.

English

The paper assessed sovereign treasury solvency and financial performance management in Nigeria from 1999 through 2016. The aim of this study is to determine the degree of solvency in Nigeria’s sovereign treasury. Ex-post ‘facto’ empirical analysis is the research method employed. Financial analysis was employed with financial performance indicators; descriptive statistics, econometric evaluation processes, and combined multiple discriminant analysis with logistic regression model as techniques of analyses. Result of the measure of solvency yields “A” performance grade score and credit rating, indicating that Nigeria’s sovereign treasury is solvent and in stable, holding other factors constant. The paper recommends obtaining public loans, which should be restricted to 50% of revenue or reserve financial assets as new policy measure to minimize excessive debt accumulation. Key words: Sovereign treasury solvency, financial health index, management of financial resources, financial performance management. &nbsp

Rethinking the Interest Deduction Rules in Light of the Chevron Australia Case

Based on the case of Chevron Australia (2017), this article argues that excessive debt loading and the transfer mispricing of financial transactions could be addressed by a limited formulary apportionment rule for debt deductions. The article also offers insights into the likely implications of the global adoption of such a model.

Kierunki rozwiązań prawnych dotyczących zmian konstrukcji indywidualnego wskaźnika zadłużenia jednostek samorządu terytorialnego

This paper aims at presenting the legal status of debts of local authorities and analysing the legal structure of individual debt ratios of such units. Limits of the statutory indebtedness aims mainly at to hindering going into excessive debts. The ratio mentioned above should also foster economic development of local authorities. For a long time, the doctrine has been calling for an introduction of certain changes in a structure of an individual debt ratio. The Ministry of Finances performs works to make it possible to restructure and repay debts earlier. Other intended changes are designed to increase financial security of territorial self-governments, what may result in lowering their creditworthiness and investment potential. This paper discusses issues related to finding an optimal legal character of the individual debt ratios.

Recent market trend of Reverse Mortgage products in the US and the UK

Abstract: This report summarizes recent market trends of the US “Home Equity Conversion Mortgage: HECM” and the UK “Lifetime Mortgage” based on a local interview conducted in 2015. HECM is guaranteed by the US FHA/HUD insurance system for consumer protection. Lifetime Mortgage has been developed historically through the group of private providers but contain the non-recourse condition in the event of excess debt, called as NNEG. Their utilization rates based on total homeowner mortgage shows niche market but 0.48%（US） and 0.7% （UK） in 2015. Now, how can we develop our product in Japan to their level?

Fiscal Compact and Debt Consolidation Dynamics

We analyse the macroeconomic effects of a debt consolidation policy in the Euro Area mimicking the Fiscal Compact Rule (FCR). The rule requires the signatory states to target a debt-to-GDP ratio below 60%. Within the context of Dynamic Stochastic General Equilibrium models (DSGE), we augment a fully micro-founded New-Keynesian model with a parametric linear debt consolidation rule, and we analyse the effects on the main macroeconomic aggregates. To fully understand its implications on the economy, we study different debt consolidation scenarios, allowing the excess debt to be re-absorbed with different timings. We show that including a debt consolidation rule can exacerbate the effects of the shocks in the economy by imposing a constraint on the public debt process. Secondly, we note that the effect of loosening or tightening the rule in response to a shock is heterogeneous. Shocks hitting nominal variables (monetary policy shock) are not particularly sensitive. On the contrary, we prove that the same change has a more pronounced effect in case of shock hitting real variables (productivity and public spending shocks). Finally, we show that the macroeconomic framework worsens as a function of the rigidity of the debt consolidation rule. As a limiting case, we show that the effects on output, employment, real wages, inflation, and interest rates are sizable.

Equity crowdfunding: First resort or last resort?

Prior research has focused on the factors that affect funding success on equity crowdfunding platforms, but a detailed understanding of the factors that drive firms to search for equity crowdfunding in the first place is lacking. Drawing on the pecking order theory, we argue that firms list on equity crowdfunding platforms as a “last resort”—that is, when they lack internal funds and additional debt capacity. In line with the pecking order theory, the empirical evidence shows that firms listed on equity crowdfunding platforms are less profitable, more often have excessive debt levels, and have more intangible assets than matched firms not listed on these platforms. We discuss the implications for theory and practice.

Feasibility Check: Transition to a New Regime for Bank Sovereign Exposure?

Excessive sovereign debt exposures of banks contributed to the gravity of the financial and sovereign debt crisis in 2011 and 2012, as well as to the slow and asymmetric recovery of European countries. Various policies that improve banks’ resilience were introduced in recent years, however the regulatory regime for the sovereign debt exposure of banks has not changed. We identify four criteria that a new regime for bank sovereign exposures should fulfill: (1) attenuate the home bias to the domestic sovereign, (2) break the doom loop, (3) avoid a flight-to-quality of assets, and (4) mitigate risk spillovers. We assess the implications for banks’ balance sheets for five policy proposals, based on simulations on a sample of European banks. We show that none of the proposals would fulfill all four criteria in the absence of a safe asset. We conclude that a new regime for bank sovereign exposure should be conditional on restoring the value of sovereign bonds as a safe asset.

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Optimal Capital Buffers of Sovereign Debt Management Offices

We model a sovereign debt manager who has a prediction of the budget deficit and needs to raise debt at the beginning of the budget period. In this setting, the sovereign may issue debt in excess of expected funding needs – a precautionary cash buffer – as a measure of self-insurance against the potential cost of inter-temporal funding. Based on budget deficit predictions that are reported under the EU’s Stability and Growth Pact and Excessive Deficit Procedure, as well as historical budget deficit data, we provide an empirical assessment of optimal cash buffers for a panel of EU countries.

Household Optimism and Overborrowing

AbstractWe use Finnish household‐level data from 1994 to 2013 to measure how often and what kind of forecast errors households make and how the errors are linked to the households' borrowing behavior and overindebtedness. We find that those households that make the largest optimistic forecast errors have greater debt‐to‐income ratios. They also are more likely to report that they suffer from excessive debt loads and have problems in coping with their bills. There are no such systematic effects for the households that make pessimistic forecast errors.

Anti-Avoidance Regulatory Policy for International Transfer Pricing and Excess Debt Financing

Multinational companies can use transfer pricing and thin capitalization (excess debt financing) to reduce the amount of taxes paid in each jurisdiction. Governments try to counteract these anti-avoidance strategies by using tax policy rules. Since the means reducing the both types of activities are different, the question is whether they should fight these phenomena to the same extent or maybe they should concentrate only on the one of them. The last policy could be appropriate if one of the strategies has strong impact on the second. Using the simple economic model one can show that these two phenomena may coexist, especially when there are large differences in taxation between countries. It means that an effective anti-avoidance tax policy should use both types of law constraints. However, due to the higher requirements for transfer pricing vehicle the limitation of excessive debt use can be more effective than the restriction imposed on misuse of transfer pricing.

Causal relationship between leverage and performance: exploring Dhaka Stock Exchange

To magnify shareholders' returns, managers employ the use of debt in the firms' capital structure. However, excessive debt financing can often cause financial distress for the firms. In fact, various debt equity ratio levels may lead to different financial performance when compared for high levered and low levered firms. Thus, the aim of this paper is to examine the cause and effect relationship between financial leverage and financial performance of firms. To pursue the purpose, a purposive sample of 163 non-financial firms listed on the Dhaka Stock Exchange (DSE) was selected to conduct this study. Findings indicate that there was no significant difference in the financial performance between high levered and low levered firms, neither in terms of their size nor growth rates. A negative relationship therefore persists between leverage and performance of such firms. Implications of these findings can provide policy guidelines for managers and directions for any further work in this context.

The Search for Inflation on a Constant Basis at 2%

The major Central Banks consider as more stable the economy horizon, when the base value of inflation close to 2% has been reached. It is assumed that a low inflation is affecting the economy efficiency, while a greater balance between the two variables is an advantage. It must be added that basic inflation close to 2% is an abstract value, undefined, because it defines the healthy global economy evolving within the natural system compatibility. In the current global economy, achieving this level of balance is out of reach. This does not mean that an approach to the inflation basic values shouldn’t be pursued, given that a balanced relationship between price inflation and GDP may indicate a tendency to the economic system rebalance. On the other hand, a correlation between Inflation and GDP is a sign of economic instability. A signal of instability due to the debt excess affecting the world economy. Unfortunately, ten years after the serious post-speculation financial crisis, the debt burden has worsened due to the pervasive use of ultra-Keynesian policies to alleviate the side effects of the severe 2008-2012 recession. In fact the post-speculation recessionary crisis did not mitigate the problem of debt excess, but did worsen it instead due to the consequences produced by the cycle support policies. The “sword of Damocles” of excessive debt, therefore, remains hanging over the global economy. In these circumstances, trying to accelerate the economic cycle could lead to a rerun of the speculative boom already experienced. While a global economy proceeding with the aim of a contained but prolonged growth, could certainly avoid to follow the “sirens” of a growing global indebtedness. Provided that monetary and fiscal policy would not derail from the right path of economy compatible growth.

Internal public debt and economic growth: the case study of Ukraine

The paper addresses an estimation of public debt-to-GDP threshold ratio in the developing economy encountered with an excessive public debt impact on macro dynamics. An active field of the study focuses on the internal public debt due to a recent tendency of external share substitution in the developing economies. Among a lot of publications dedicated to the public debt, the study object usually focuses on an array of countries using the same method to evaluate the threshold ratio. Analyzing behavior specifics concerning economy in crises and thereafter, there is a need to carry out the public debt study for the particular economy as well. The research suggests an algorithm for determining internal public debt-to-GDP threshold ratio by applying a scenario modeling tool. Taking into account a growing burden of public debt in Ukraine, the authors have elaborated an econometric macro model operated through fiscal-monetary interaction. The model was used to evaluate the internal public debt-to-GDP threshold ratio in Ukraine. The threshold ratio proves to be 40% of GDP, while the similar result for the total amount of public borrowings is about twice as high. Although the given ratio remained below the estimated threshold as of the mid-term of 2017, a space degree is small and going to collapse soon. Considering sluggish economic recovery following the last recession took place in 2014–2015, Ukraine will face the challenge of reopening the agenda of growing debt burden in a near future.