Debt Market Research Articles

Loan-to-Value Regulations on Mortgages and the Use and Refinancing of Unsecured Debt

We study how loan-to-value (LTV) regulations on mortgages can change the use of unsecured debt and mortgage refinancing behaviors for households at or near the regulatory limits imposed. This study focuses on the differences in unsecured debt market participation between Norway and Sweden, where LTV regulations are in effect, and Denmark and earlier studies, where no LTV limits are imposed. We analyze the unsecured debt loan market using data from a repeated household survey from 2019 and 2021 with 4,010 and 3,023 respondents, respectively. We also explore mortgage lending and unsecured debt using a unique micro data set covering 7,385 Norwegian households. Our analysis shows that unsecured debt increases with LTV level but that households’ refinancing behaviors explain the lower increase in unsecured household debt at or near the regulatory limit for LTV on mortgages. We further demonstrate that an increasing number of households cannot refinance unsecured debt with mortgage debt. This lack of ability can lead to a rapid increase in the number of financially vulnerable households. We are the first to demonstrate that changes in different debt sources and refinancing patterns can increase the number of financially vulnerable households when LTV regulations are imposed solely on mortgage debt.

Пандемия COVID-19 как фактор наращивания государственного долга. Опыт Казахстана в контексте мировой ситуации

One of the main effects of the COVID-19 pandemic is a significant aggravation of the debt burden in most countries of the world, due to increased costs to support the economies. In Kazakhstan, similar problems also caused a significant increase in the volume of public debt and expenses for its servicing, while due to the specifics of the country’s economic model, the channels of influence of the pandemic on the debt sector were more numerous because of the impact of external shocks. The growth of government debt and the debt servicing cost during the pandemic years was affected by such factors as the growth of budget’s expenditures to support the economy; a drop in revenues due to lower oil prices; the devaluation of the tenge and growth of the cost of servicing external debt; increase of interest rates in the domestic debt market. A comparison of the parameters of public debt increase and loss of economic growth based on the ratio of these two indicators is proposed as a generalized indicator of the effectiveness of debt buildup during the pandemic. This approach showed that the debt increase in Kazakhstan was quite effective. Nevertheless, the effects of the fight against the pandemic had a serious negative impact on Kazakhstan’s public finance system, and in the debt sphere the main problem now is the escalation of debt servicing costs, which will be a significant burden on the budget process, at least for the next few years.

Transparent Budget in the System of Public Administration

One of the main effects of the COVID-19 pandemic is a significant aggravation of the debt burden in most countries of the world, due to increased costs to support the economies. In Kazakhstan, similar problems also caused a significant increase in the volume of public debt and expenses for its servicing, while due to the specifics of the country’s economic model, the channels of influence of the pandemic on the debt sector were more numerous because of the impact of external shocks. The growth of government debt and the debt servicing cost during the pandemic years was affected by such factors as the growth of budget’s expenditures to support the economy; a drop in revenues due to lower oil prices; the devaluation of the tenge and growth of the cost of servicing external debt; increase of interest rates in the domestic debt market. A comparison of the parameters of public debt increase and loss of economic growth based on the ratio of these two indicators is proposed as a generalized indicator of the effectiveness of debt buildup during the pandemic. This approach showed that the debt increase in Kazakhstan was quite effective. Nevertheless, the effects of the fight against the pandemic had a serious negative impact on Kazakhstan’s public finance system, and in the debt sphere the main problem now is the escalation of debt servicing costs, which will be a significant burden on the budget process, at least for the next few years.

Flights-to-quality from EM Bonds to safe-haven US Treasury Securities: A time-frequency Analysis

ABSTRACT We study 2001–2020 flight-to-quality episodes encompassing two planetary-scale crises: the Global Financial Crisis (GFC) of 2007–2008 and the coronavirus-triggered global meltdown. We focus on time-frequency lead-lag nexuses between holding emerging market (EM) debt and investing in relatively risk-free US Treasuries. Wavelet coherency along with the phase-difference approach is used. Our results reveal varying lead-lag patterns and low-coherence zones between EM bonds and US Treasuries, which imply the existence of appealing diversification attributes. The flights-to-quality during the crisis periods, such as the GFC and COVID-19 pandemic, emphasize the safe-haven characteristics of US Treasures. They also evidence that the post-Covid tightening of credit spreads to the pre-crisis levels is faster than the post-GFC recovery. We demonstrate that for EM debt investors, the US Treasury market allows for dynamic risk mitigation strategies during both global crises.

Debt dynamic, debt dispersion and corporate governance

PurposeThis paper addresses the following questions: Why do some firms employ multiple debt types? What explains debt heterogeneity? Is the choice of the source of debt a function of corporate governance?Design/methodology/approachThe author's paper is empirical and uses multiple regression analysis.FindingsFirms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Contrastingly, firms that are well-managed tend to concentrate debt and borrow predominantly from a few creditors. The author also found that while bank debt is negatively associated with debt concentration, market debt is positively associated with debt concentration.Research limitations/implicationsFirms under weak corporate governance have a higher propensity to use multiple debt types and have a dispersed debt structure. Well-managed firms tend to concentrate debt and borrow predominantly from a few creditors. Bank debt is negatively associated with debt concentration and market debt is positively associated with debt concentration.Practical implicationsPolicymakers and practitioners need to account not only for changes in the firm’s total debt level but also for changes within the firm’s debt composition. Understanding a manager’s choice of debt structure can incentivize creditors to effectively monitor and use debt concentration as a form of commitment device that transfers some control rights from the manager to creditors.Originality/valueWhile a vast body of corporate finance literature examines the conflict between shareholders and management, there is little empirical work on the conflict between creditors and management. In this paper, the author examines how managerial entrenchment affects debt structure. The results provide a comprehensive picture of how corporate governance influences debt choice(s).

Cross‐border and domestic minority acquisitions and financial constraints: Reaping big benefits from small shareholders

AbstractResearch Question/IssueDo the motivations of cross‐border minority acquisitions differ from those of domestic minority acquisitions? We examine and compare the underlying motivations for and consequences of domestic and cross‐border minority acquisitions by analyzing data from transactions that took place across 31 countries over a 13‐year period.Research Findings/InsightsUsing a sample of 11,926 domestic and cross‐border minority acquisitions, we show that the interplay of financing and country‐level governance motives is the main driver of such deals in both settings. We find that financially constrained firms are more likely to engage in both domestic and cross‐border minority acquisitions, even in the face of higher information asymmetry and transaction costs that international transactions entail. In the wake of either domestic or cross‐border deals, financially constrained firms' long‐term debt increases; their short‐term debt, cash holdings, and equity decrease. The greater likelihood of minority acquisitions of financially constrained firms is explained by the degree of corporate governance institutions in the country in which the targeted firm is based and by differences in levels of creditor and shareholder protections between the home countries of the targeted and acquiring firms involved. Our results remain robust after controlling for alternative explanations such as the contracting motive, the gravity model of foreign transactions, economic development levels, and differences in tax and exchange rates.Theoretical/Academic ImplicationsOur results extend prior literature on mergers and acquisitions that have focused solely on control transfers or domestic deals. We provide empirical evidence for the importance of jointly considering financing and governance motivations in seeking to explain domestic and cross‐border minority acquisitions and their consequences in alleviating financial constraints. We provide new evidence on how firm‐ and country‐level characteristics interact to affect minority acquisitions.Practitioner/Policy ImplicationsOur results offer valuable insights for business policy by highlighting how firms can circumvent financial constraints through partial integration, especially in cross‐border settings. The results also offer evidence of beneficial ex post outcomes for targeted firms' leverage and liquidity. In terms of public policy, the results show that minority shareholder protections improve the equity market and provide a positive externality to the debt market through a certification effect.

Does CSR Affect the Impact of Real Earnings Management on the Cost of Debt?

Purpose - We explore how corporate social responsibility (CSR) plays a role in the debt market when companies engage in real earnings management. Specifically, we analyze the cost of capital of a company with real earnings management as measured by abnormally operating cash flows, abnormally production costs and discretionary expenditures, and examine the role of CSR in the relationship. Design/Methodology/Approach - The analysis sample is for Chinese publicly listed companies, the data were obtained from China Stock Market and Accounting Research (CSMAR), and the CSR data were collected from the Hexun database. We implemented OLS regression analysis by setting the proxies of real earnings management as dependent variable, cost of debt capital as a dependent variable, and CSR as a moderating variable. Findings - Our empirical results show that real earnings management significantly increases the cost of debt after controlling for discretionary accruals, another proxy variable for earnings management. Especially, we find that corporate social responsibility weakens the negative impact of real earnings management on the cost of debt. Research Implications - This study provides evidence that corporate social responsibility plays a significant role in mitigating the adverse impact of real earnings management on the debt market. Therefore, creditors in the debt market need to be more cautious in assessing the impact of real earnings management that may be underestimated due to high CSR performance.

The Effect of Access to the Public Debt Market on Corporate Financing Decisions: The Case of REITs

We examined the effects of access to public debt on the corporate financing decisions in real estate investment trusts (REITs) using a difference-in-differences approach and a propensity score approach. The introduction of credit ratings by S&P and Moody’s has allowed REITs to access the public debt market. To investigate the impacts of the introduction of credit ratings, we compared the financing policies in REITs with initial credit ratings before and after the introduction of credit ratings with REITs that had not obtained a credit rating between 1980 and 2016. After obtaining credit ratings, REITs have significantly increased the corporate leverage ratios and the use of long term debt, which suggest that REITs were constrained from debt financing, in particular long term debt financing, in the past until they could gain access to the public debt market after the introduction of credit ratings. Access to the public debt market has also significantly reduced both equity issuances and cash holdings. Our empirical results suggest that the introduction of credit ratings can reduce information asymmetry, and affect REITs’ capital structure decisions and the level of cash holdings.

Firm Value, Size, Liquidity and the Adoption of Common Accounting Standards: Evidence from Firms Listed on the Amman Stock Exchange

Adopting common accounting standards presents both benefits and challenges to firms and the resultant effects of such adoption vary between firms and countries. The value of firms revolves considerably around the adoption of common accounting standards, firm and country specific factors. Consequently, this study examines the firm size, liquidity and the adoption of common accounting standards on the value of capital and debt market firms listed on the Amman Stock Exchange. A Fixed Effect Model was estimated using data collected from 5 capital market firms and 4 debt market firms listed on the Amman Stock Exchange in Jordan. The data was from the period 2009 to 20018 and was analysed using the aid of Eviews 10. The findings revealed that there is a positive relationship between firm size, liquidity and performance, and stock prices. The disclosure of financial information and an improvement in earnings per share were noted to be causing a decline in stock prices of capital and debt markets in Jordan. Practically, the study implies that sound liquidity, asset and performance management strategies are vital for improving the value of capital and debt market firms listed on any stock exchange. The study also reiterates that improvements in firm value are vital for improving social and economic aspects in any economic context.

First offshore bond issuances and firm valuation

Does the first offshore bond initial public offering (BIPO) affect firm valuation? By using a sample of US firms we document the dynamics of the firm valuation in response to initial offshore bond issuance. We find that offshore BIPOs have a positive short-term effect on US firms' valuations. The effect varies in firm characteristics, timing, and the location of the issue. Positive valuation effect is further confirmed by using difference-in-differences analysis approach, where offshore bond issuers are compared with their domestic counterparts. Additionally, firms with a strong need for external funds and growth prospects accelerate their offshore public debt market entry.

How do emerging debt market participants recognize firm internationalization?Evidence from effects on credit ratings

We explore the firm internationalization's impact on firm credit ratings in emerging economies. Adopting Chinese data from 2009 to 2018, we document that firm internationalization varies negatively with its credit ratings, indicating that emerging debt market participants are risk averse and prioritize the risks involved in firm internationalization endeavors. This association is amplified for firms operating in host countries with lower institutional quality, decreased cultural distance from home countries, and when firms do not hold tax haven subsidiaries. We observe that the main association is consistent when alternative dataset (India, Russia, and Brazil) or proxy (cost of debt) is applied.

Evolution of Emerging Markets Debt Investing

1. Chia Liang Lian 1. is the head of Emerging Markets Debt at Western Asset Management in Pasadena, CA. (chialiang.lian{at}westernasset.com) As an asset class, emerging market (EM) debt has undergone a structural evolution to cover more than 70 countries in the past 30 years. One unintended consequence of this asset class’s multifarious attribute is that it is prone to being misunderstood. In this article, the author postulates that for the strategic investor, the nonmonolithic attribute of EMs represents a compelling feature rather than an inherent flaw. The investment proposition for the asset class has witnessed dynamic shifts at different points of the market cycle. During this period, the author suggests that there are three discrete stages of development in the manner by which investors interact with EMs: market access in the 1990s, market boom in the postmillennium decade, and market innovation presently. The author expects a future trend of increased customization to align investment exposures with intended objectives and a secular shift away from an off-the-shelf, index-based approach.

Theory and evidence of the impacts of Shariah debt screening on firm behaviour

PurposeThe paper aims to construct a theoretical framework to investigate whether the Shariah debt ratio screening in contemporary Shariah stock screening methodologies results in a bias towards a certain set of corporate financial behaviour for Shariah-compliant firms in the USA where access to a liquid Islamic debt market is non-existent.Design/methodology/approachThe paper extends the earnings valuation approach of Modigliani and Miller (1963) to theoretically asses the impacts of the 33% conventional debt limit on Shariah-compliant firms’ corporate financial behaviour. Then, supporting evidence is shown via empirical stylised facts of samples of Shariah-compliant firms in the USA.FindingsA theoretical floor limit to investment cut-off rates is found for US Shariah-compliant firms so that lesser projects pass their internal rate of return versus conventional firms. Subsequently, such firms consistently show the following corporate financial characteristics: above-average size, larger marginal change in size and profitability in response to a given marginal change in investments, low book-to-market ratio and lower investment rates.Research limitations/implicationsThe findings of this paper may not hold where access to a liquid Islamic capital market is present.Practical implicationsCaveat emptor. These findings may be inconsistent to the investor’s risk preferences.Social implicationsThe findings suggests that Shariah-compliant firms are more conservative compared to their conventional counterparts.Originality/valueThe paper is the first to introduce a theoretical framework to address consistent biasness in corporate financial behaviour due to the Shariah debt screening. It may prove useful for future academic studies as well as investment managers.

Debt structure and debt overhang

We study the impact of heterogeneous debt structures on corporate financing and investment decisions in a dynamic trade-off model. The issuance of bank debt along with market debt accelerates investment and mitigates the ex-post debt overhang relative to exclusive market debt structures. A growth firm optimally increases its reliance on bank debt and decreases its usage of market debt when it has fewer valuable growth opportunities, its asset volatility is higher, its bankruptcy cost is lower, or it faces a low tax rate environment. We identify the non-monotonic effects of the cyclicality of growth opportunities on firms’ optimal debt composition.

How the debate about the ECB debt cancellation differs from older (and much older) ones

In the last decade, a debate on the influence of public debt on political regimes has (re)emerged. Public debt scholars have rallied around two opposing projects: many of them advocate for constitutional constraints, while some denounce the market debt as a threat to the welfare state. In 2020 and 2021, a fierce debate occurred among the second group concerning the cancellation of European public debt held by the European Central Bank. This article suggests that the restrainers, the cancellationists, and the anti-cancellationists consider, for different reasons, that representative democracy and sovereign debt could be a deadly threat to each other.

Emerging Markets Debt Securities: A Literature Review

This article provides a comprehensive review of the literature on emerging market debt securities. Compared to the developed world, this segment of the bond market is less established, both for the types of securities that are issued and for the entities that issue them. The literature reflects that. The focus of research on emerging debt markets has evolved over time along with the changes in the composition of the market. This review covers the modern era, from the early 1990s up to today, yet includes a lookback at foregone times.

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Abstract. Introduction. This article is devoted to the state of public global public debt and new approaches towards its regulation in both developed and developing countries. The theoretical and methodological bases of effective external debt management are considered in the paper. Globalization of the world economy and finance has led to increasing of funds raised in the international debt market and strengthened its part in the system of world finance. Purpose. The subject of this research is public debt in different groups of countries. Analysis of the situation with global public debt and the peculiarities of its regulation is necessary to learn positive foreign experience for its possible application. The following factors of significant increase of public debt are outlined: severe reduction of economic activity and decline in government revenue; increase of public spending, including related to anti-crisis measures; growing primary deficit, and this, the need to increase borrowings. The countries with low and middle income additionally face significant capital outflows from their financial markets, devaluation of national currencies, and difficulties with debt refinancing. Results. The article examines the problem of the external debts growth of different countries, dynamics and modern structure of the global external debts and efforts made by the international institutions and national regulators in order to tighten control over operations in the international debt market. The author comes to conclusion that an aggravation of the problem of external debts globalization hampers the restoration of stability and sustainable growth of the modern world economy. The main tasks performed in the process of public debt management are determined. The means of debt management, in particular, the mechanisms for restructuring public debts, are determined. The paper reviews the organizations involved in the restructuring of public debt. Conclusions. The obtained results can be used for further prospective studies of external debt management mechanisms taking into account world practice, as well as for the implementation of debt policy instruments in the crisis period.

Trust and Debt Contracting: Evidence From the Backdating Scandal

AbstractWe study the effect of trust on debt contracting. We find that, after the revelation of option backdating, borrowers that likely backdated their previous option grants pay higher interest rates on loans. This adverse effect is mitigated by CEO replacements. Results are similar for public debt, but only if a third party identified the backdaters. After the backdating revelation, firms that engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints.

The geography of information: evidence from the public debt market

Abstract We investigate the link between the spatial concentration of firms in large, central metropolitans (i.e. urban agglomeration) and the cost of public corporate debt. Looking at bond issues over the period 1985–2014, we find that bonds issued by companies headquartered in urban agglomerates have lower at-issue yield spreads than bonds issued by firms based in remote, sparsely populated areas. Measures of the count of institutional bondholders in a firm’s vicinity confirm that the spatial cross-sectional variation in bond spreads is driven by the proximity of metropolitan firms to large concentrations of institutional investors. Our results are robust to controls for firm productivity and governance, analyst following, and exogenous shocks to institutional investor attention. The effect of headquarters location on bond spreads is especially pronounced for more difficult to value, speculative-grade bonds, bonds issued by smaller, less visible firms and bonds issued without protective covenants. Overall, we provide evidence that the geographical distribution of firms and investors generates a corresponding distribution of value-relevant, firm-level information that affects its cost of capital.

On the determinants of regional government debt in Russia

ABSTRACT This paper provides an analysis of the determinants of regional government debt in the Russian Federation using data from 2005–2017. We document that total indebtedness of Russian regions has grown substantially since 2010 and find significant changes in the structure of regional debt, primarily the increased use of budget credits offered by the federal government. Market debt instruments are determined by a different set of factors than non-market instruments. In fact, poorer and less fiscally independent regions have lower access to budget credits and are forced to rely on more expensive market debt instruments, particularly commercial loans. Budget credits and commercial loans are shown to be substitutes, although the nature of this substitution is contrary to declared redistributive goals of public policy. Finally, we find the presence of horizontal strategic interactions in debt issuance across Russian regions: regions react positively to increased debt issuance in the same federal district.