Debt Servicing Capacity Research Articles

The costs of corporate debt overhang

We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm’s debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

The impact of local incentive-based legislation on the financing constraints of private firms–Evidence from China

This study selects A-share private firms in Zhejiang Province and its neighboring provinces in 2018–2021 and finds that private firms’ incentive-based legislation significantly alleviates private firms' financing constraints through a double difference model. The legislation alleviates the financing constraints of private firms by reducing the burden of financial liabilities, broadening financing channels such as operating liabilities, and enhancing debt servicing capacity. The effect of the private firm's incentive-based legislation on alleviating financing constraints is more pronounced in firms that are consistently private, have higher tax burdens, have lower competition in the industry, and do not have internal control deficiencies.

Rating Politics: Sovereign Credit Ratings and Democratic Choice in Prosperous Developed Countries – A Summary of the Argument

Abstract This article summarizes the core argument of ‘Rating Politics: Sovereign Credit Ratings and Democratic Choice in Prosperous Developed Countries’, co-authored by Zsófia Barta and Alison Johnston and published by Oxford University Press. The book shows that credit rating agencies have become central actors in global governance by dint of their propensity to assign penalties and rewards to the political and policy choices of sovereign governments. It explores the logic according to which those penalties and rewards are meted out, and argues that these rewards and penalties not only constitute a violation of democratic sovereignty, but potentially undermine long-term economic growth and social and political stability, thereby also weakening countries’ long-term debt-servicing capacity.

تحليل جدوى حساب الخزينة الموحّد في العراق – دراسة تجريبية حول تاثيرات واليات تطبيق الحساب والبنية الاساسية المتاحة له.

The Treasury Single Account (TSA) is one of the most important pillars of the Integrated Financial Management System (IFMIS), and it is one of the proven practices in the field of improving payment systems, collecting tax revenues, and controlling public spending appropriately through central dealing with the balances of free government bank accounts. The current research aims to determine the possibility of benefiting from this account by the Iraqi government by discussing the availability of the basis and technical capabilities for implementing this account in Iraq, while indicating the expected repercussions on the efficiency of public financial management in the economy and the extent of the ability to raise the level of benefit from monetary resources. The research was used. The inductive analysis approach, adopting the quantitative method in collecting data, analyzing it, and drawing conclusions from it, and the research reached an important conclusion that the use of the unified treasury account in Iraq can positively support the issues of debt service, liquidity levels, and credit capacity in the country. The research recommended the need to apply the mixed method ( Between central and decentralized) for the account because it is compatible with the financial infrastructure currently available in the country.

Decomposition of non-performing loans dynamics into a debt-servicing capacity and a risk taking indicators

Using Colombian credit vintage data, we decompose non-performing loans into two main components: one capturing the evolution of borrowers’ payment capacity and another reflecting changes in the credit risk assumed by banks when granting loans. We employ intrinsic estimators and penalized regression techniques to address the perfect multicollinearity inherent in the model. Our analysis reveals that these two components have evolved differently over time and that they interact with the real and credit cycles distinctively. In particular, we find that a favorable economic environment and loose financial conditions improve the payment capacity of borrowers to meet their obligations, but coincide with increased risk-taking by financial institutions. Finally, we advocate for the adoption of this decomposition as a policy tool, easily applicable by financial and economic authorities with access to a continuous flow of credit vintage data. This methodology facilitates the identification of credit risk origins, thereby informing economic policies aimed at mitigating systemic financial risks.

Stress Testing the Corporate Debt Servicing Capacity: A Scenario Analysis

The total volume of outstanding debt issued by U.S. nonfinancial firms relative to GDP has increased by about 8 percentage points in the past decade. While a growing volume of debt was largely viewed as benign in the low interest rate environment of the 2010s, the rapid increase in both short- and long-term rates since early 2022 has raised concerns about the debt-servicing capacity of the corporate sector.

Debt Sustainability Assessment in the Biogas Sector: Application of Interest Coverage Ratios in a Sample of Agricultural Firms in Italy

The biogas sector in Europe and Italy is attracting growing investment, combining agricultural activity, the circular economy, and renewable energy production. Firms in the sector widely use debt capital and, for this reason, there is a need to evaluate the structure of investments, financing, and debt service capacity calculated by applying interest coverage ratios (ICRs). ICRs are widely used by banks in granting loans, and calculation of ICRs allows managers and policy makers to correctly evaluate firms’ performance in the sector. In this research, based on a sample of 160 observations, the structure of investments and sources of financing of firms in the biogas sector, operating in northern Italy, are analyzed. ICRs are calculated with different approaches to establish which ICRs provide the most reliable results in the application. The research analyzes the correlations and highlights significant differences between ICRs. The research highlights some important findings: (a) the NWC is negative in 109 out of 160 observations and, therefore, constitutes a source of financing in the majority of observations; (b) ICRs based on EBITDA and CF are above the threshold value of “1” in 143 and 145 observations, respectively, while ICRs based on EBIT, OCF, and UFCF are above the threshold value of “1” in 132, 133, and 122 observations, respectively. The research allows the conclusion that the ICRs based on EBITDA and CF tend to overestimate results; ICRs based on EBIT, OCF and UFCF are preferable, and can therefore be applied by managers, banks, and policy makers and be used as debt covenants. For the calculation of the repayment of the NFP, the research has highlighted that ICRs in which the cost of the debt is deducted from the numerator are preferable. The research can thus be usefully applied and expanded to other territories, or by considering a larger sample with the aim of inferring conclusions of general validity.

An Empirical Analysis on the Feasibility of Financial Valuation of Technology Companies: A Fundamental Analysis Approach Based on Value Investing

This study addresses the significant challenge of accurately valuing internet companies in the contemporary business landscape, recognizing existing research gaps due to the limited applicability of conventional valuation methods such as Net Present Value (NPV) and Price to Earnings (PE) ratios in this emergent industry. This paper conducted a fundamental analysis based on the principles of value investing, utilizing 2022 financial data from thirteen internet companies listed in Forbes Global Technology companies. Key financial aspects, including liquidity, debt-servicing capacity, profitability, and shareholder returns, were meticulously analyzed. The findings reveal that internet companies face cash flow pressures impacting their liquidity. Despite a moderate long-term debt ratio, companies exhibit substantial reliance on debt financing, encountering difficulties in interest payments. While these firms demonstrate a capacity for profitability, they concurrently face intense competition and cost pressures. The market sentiment remains highly optimistic regarding the future prospects of internet companies, reflecting elevated valuations. In light of favorable market conditions, it is imperative for internet companies to strategically enhance competitive advantages, bolster core product competitiveness, and amplify profitability through innovative operational and marketing strategies, thereby augmenting their industry influence and societal impact.

Peer Effects on Capital Structure Decisions: Empirical Evidence from Selected Listed Companies of DSE

In the dynamic landscape of corporate finance, the effect of social dynamics on decision-making processes is a subject that deserves closer examination. This study attempts to capture effects of peer firms on capital structure decisions on listed firms of DSE from Food & Allied, Power & Fuel, Cement and Ceramic sectors during 2014-15 to 2021-22. We have used industry median leverage to measure peer firm’s capital structure decision. Results of Fixed effects model using a panel of 280 firm-year data suggest absence of peers’ effects on capital structure decisions of firm. The key variable of interest – industry median Total Debt ratio (TDR), Short term debt ratio (STDR) and long term debt ratio (LTDR) ratio have positive but statistically insignificant effects on firm’s TDR, STDR and LTDR respectively. Consequently, this study rejects the peers’ influence on capital structure decisions, concluding that capital structure is independent of peer dynamics. The finding further reveals cash generating efficiency and liquidity to be negatively associated with leverage. Asset growth rate exhibits significant positive association with leverage. Firms possessing more tangible assets prefer long term debt. Debt servicing capacity has significant positive effects on STDR. Total assets growth rate is positively associated with debt. The findings suggest that Bangladeshi managers emphasize on firm-specific aspects when making capital structure decisions. They should prioritize the firm’s strengths, opportunities, risks, weaknesses, conditions, and strategy over peer decisions.

Supply Chain Finance and Financing Efficiency of Technology-based SMEs

Abstract Shortage of funds and inefficient financing have been the main problems faced by science and technology-based SMEs. Supply chain finance is aiding science and technology-based SMEs in obtaining financing opportunities and reducing the cost and difficulty of financing. This paper constructs a model for assessing financing efficiency with the help of Data Envelopment Analysis (DEA). And combined with the financing constraints commonly encountered by SMEs in the financing process, which affect the financing efficiency, it proposes a mediation effect model to analyze the influence of financing constraints. At the same time, the financing constraints faced by SMEs in science and technology are examined through an empirical model, and the mitigating effect of supply chain finance on financing constraints is analyzed through a model test. In the analysis of financing efficiency, the interest expense and pre-tax debt financing cost of DL science and technology-based companies are decreasing after supply chain finance financing. The interest expense is reduced by 2,009,200,200 in 2022 compared with 2019, and the pre-tax debt financing cost decreases to 6.12%. The proportion of supply chain financing in financing loans is more than 50%, the speed of capital turnover and financing efficiency have significantly improved, and the debt servicing capacity, operating capacity, and profitability have been improved.

Impact of COVID-19 on China's A-share Real Estate Market

With the outbreak of the 2019 epidemic, many industries have been affected to a greater or lesser extent. The real estate market is huge and involves many industries, so it is particularly important to analyze how it will be affected by the epidemic This study analyses the profitability and financial position of three large real estate companies, Vanke A, Jindi Group and China Merchants Shekou, by using a case-based analysis of their revenue and profit growth rates, return on net assets, gross sales margin, net profit margin and debt servicing capacity. companies. Based on the comparison of the three red lines and the impact of the epidemic on the development of the three companies before and after the epidemic, corresponding recommendations and decisions are given. This paper will help to analyze and predict how the property market will fluctuate in the aftermath of the epidemic and what measures should be taken in aftermath.

IPO suspension, financing uncertainty and corporate tax avoidance

The acquisition of external financing is an important factor affecting the development of enterprises and even the economic growth of a country. However, changes in the external environment often expose enterprises to uncertainties in obtaining external financing. Taking China’s initial public offering (IPO) suspension policy as a setting, this paper examines the impact of the associated external financing uncertainty on firms. The empirical results show that firms that are unable to secure planned financing due to the IPO suspension policy engage in greater tax avoidance activities than successful IPOs during the IPO suspension period; this phenomenon is mainly concentrated in firms that are not state-owned, have no venture capital or private equity backing, have lower debt servicing capacity and have lower tax avoidance risk. Moreover, the tax avoidance activities of enterprises positively influence their fixed asset investment and innovation investment during the IPO suspension period. Evidence based on IPO price performance indicates that investors respond positively to firms’ tax avoidance practices during IPO suspensions.

Drivers of Corporate Investment in India: Assessing the Impact of Monetary Policy and COVID

Empirical investigation finds that firm-specific factors, namely deleveraging of balance sheets, comfortable cash flows and improving debt servicing capacity impact fixed investment in private corporate sector positively. Monetary policy impacts fixed assets investment growth of financially constrained firms more compared to non-financially constrained firms. Furthermore, the impact of COVID pandemic on investment was more adverse in case of weak firms. JEL Codes: G3, E22, O16, E52

The effect of major public emergencies on technology-based SMEs: Survival crisis and relief paths

This paper explores the impact of major unexpected public event on the survivability of technology-based small and medium-sized enterprises and the role of external support policies and internal adjustment strategies in mitigating the shock. Using data on Growth Enterprise Market listed companies for 2018–2021, we found that COVID-19 outbreaks caused severe survival pressure on technology-based SMEs, which we see mainly in the reduction of development capacity, operation capacity, profitability, and debt servicing capacity. Additionally, we find that both external support policies and internal adjustment strategies can effectively mitigate the negative impact of COVID-19 on the viability of technology-based SMEs.

An Analysis of Xueda Education's Financial Performance in the Context of Covid-19

The Covid-19 pandemic has had a significant impact on large enterprises in China, resulting in closures and staff layoffs, which have negatively affected the training education industry. This paper presents a case study of Xueda Education, a listed company, to analyze its financial situation from 2017-2020, the first three years of the pandemic, and 2020-2023, another three years of the pandemic. The study uses financial indicators to discuss the development problems of training education in terms of profitability, development capacity, solvency, and operating capacity. A side-by-side comparison method is used to compare Xueda Education's financial performance with two other companies in the same field. The study concludes that Xueda Education's profitability, development capacity, solvency, and operating capacity decreased, especially in terms of operating capacity. The short-term solvency of the debt servicing capacity decreased, while the long-term solvency capacity did not change significantly. The study proposes solutions for improving the financial risk system and finding new ways to sustain the company. This paper provides valuable insights for policymakers and researchers in the training education industry to address the impact of Covid-19 on enterprises and the industry.

What Affects the Corporate Performance of Listed Companies in China’s Agriculture and Forestry Industry?

China is embarking on a new journey to build a comprehensive socialist modern state in the new era. Modernization of agriculture and forestry is the basis of agricultural modernization, but China’s traditional agriculture and forestry industry are facing a more serious crisis of independent research and innovation. As the listed agroforestry companies are directly facing the demands of the market, it becomes essential to study the technological innovation of listed agroforestry companies. Therefore, this paper investigates the relationship between R&D innovation, corporate management, supply chain management, growth capacity, debt servicing capacity, and corporate performance of listed agroforestry companies. Based on the annual panel data of agroforestry listed companies in the CSMAR database from 2010–2021, the empirical study was conducted using panel PVAR models, OLS, 2SLS, LIML, and GMM estimation. The findings show that: (1) Granger causes affecting the supply chain management of listed companies in agroforestry are corporate management, debt servicing capacity, and growth capacity. Granger causes affecting the debt servicing capacity of listed companies in the agroforestry industry are R&D innovation, growth capacity, and corporate performance. Among them, there is a causal influence relationship between debt servicing capacity and corporate performance. (2) R&D innovation, corporate management, supply chain management, growth capacity, debt servicing capacity, and corporate performance contribute the most to its own impulse response, with an average contribution of 87.4%, 81.8%, 86.9%, 96.9%, 86.5%, and 94.7%, respectively. Compared to the other variables, the impulse response contribution of debt servicing capacity to corporate performance was the largest. (3) When supply chain management and growth capability play a fully mediating role, there is a significant positive effect of R&D innovation on corporate performance. Finally, we offer some policy recommendations and suggestions to the Chinese government, as well as some suggestions on how Chinese-listed companies in the agroforestry industry can improve their corporate performance. This paper provides a Chinese case study on the corporate performance of listed companies in the global agroforestry industry.

Analysis of the Capital Structure in Sustainable Infrastructure Systems: A Methodological Approach

Many countries require financial mechanisms, leading to increasing coverage through sustainable infrastructure systems (SISs). However, establishing such mechanisms demands innovative approaches and analyses that contribute to the development of financial schemes by providing a new vision for private investors and public entities promoting sustainable development and, therefore, the creation of new eco-financial assets. To address this need, this paper proposes a methodology for analyzing capital structure in sustainable infrastructure systems, which is validated in a case study. Thus, a mathematical model that identifies the impact on the final capital structure according to an investment plan and capital structures per period is developed. Additionally, this proposal integrates a financial framework that involves sustainable financing, capital markets, and public–private sectors. The results of the case study show that debt-service capacity was always higher than 1.0×. Hence, this study provides a better understanding of financing processes for SISs. Additionally, this contributes to the debate on infrastructure financing and its implications for main stakeholders.

Insiders' stock pledging disclosures and credit ratings: Evidence from India

We examine the impact of insiders' stock pledging disclosures on credit ratings of different debt instruments in India. The rating agencies extend a negative response in the form of low credit ratings for pledging firms compared to non-pledging firms - irrespective of any particular debt choice (private versus public) and debt maturity (short-term versus long-term). Insider stock pledging increases the likelihood of credit rating downgrade and the rating-watch status. It contains information about pledging firms' debt-servicing capacity and adversely affects credit ratings for firms with higher information asymmetry. Our findings also support an increase in the cost of debt for pledging firms.

Analyzing the Debt Behavior of Farm Households in the Maharashtra State of India

The number of farm suicides in India is alarming. While the official data on farm suicides released by National Crime Records Bureau (NCRB) shows a rising trend till 2015, the figure went slightly down from 12,590 in 2015 to 10,338 in 2018. Any increase in the farm suicide cases in India is worrisome because of majority of population's dependence on agriculture. The report also mentions about the various reasons for farmers committing suicide with bankruptcy being a major cause of suicide among farmers. Considering the dismal state of farm suicides in the Maharashtra state of India, the present study attempts to analyze the debt behavior of the farm households for two time periods viz. 2004-05 and 2011-12. The study uses information on debt behavior of farm households in Maharashtra collected through two rounds of India Human Development Survey (IHDS) survey, which is a nationally representative, multi-topic survey across India. The first round of interviews was completed in 2004-05 and the second round of IHDS re-interviewed most of these households in 2011-12. The sample consists of a total of 1543 households in 2004-05 and 1685 households in 2011-12 in the Maharashtra state. The state of Maharashtra has been divided into 5 divisions viz. Konkan, Vidarbha, Nashik, Pune, and Marathwada. The sample households in the state have been divided based on land ownership and size of land into Agri wage laborer, small and marginal, medium, and large farm households. The debt profile of the households is analyzed using information on the share of indebted households, number of loans taken in the past 5 years, average loan size, outstanding debt, interest rate on the largest loan, debt-servicing capacity, debt-to-income ratio, consumption-income ratio, etc. The study also attempts to identify the key factors that are likely to have contributed to the highest number of farm suicides in Maharashtra and also provides policy suggestions for the government. The comparison between the two time periods not only helps understand what went wrong with the finances of farmers during the study period but also helps us identify the factors which may result in farmers taking such extreme steps in the future.

Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods

This paper explores the changing relationship between current household repayment capacity and mortgage default during crisis and non-crisis periods in Ireland. We measure repayment capacity through changes in the current debt-service to income ratio to directly capture the affordability shock channel. We find that deteriorations in current debt servicing capacity have a positive and increasing effect on default which is dependent on the level of indebtedness or absorptive capacity. We find that the relationship between deteriorations in repayment capacity and default are worsened in crisis times due to the presence of negative equity and liquidity constraints in these periods.