Debt Specialization Research Articles

The Determinants and Impacts of Capital Structure Complexity: A Review of Literature

This paper aims to provide a review of the determinants and impacts of capital structure complexity. The review covers papers from the Scopus and Web of Science databases from 2010 to 2020. A total of fifteen eligible articles were chosen for review. The search terms used “debt specialization," "debt diversification," "capital structure complexity," "debt complexity," "debt heterogeneity," and "debt concentration." We focus on the articles that discuss the determinants of capital structure complexity, the impacts of having a diversified capital structure, and the theories used to explain the relationships between them. The review indicates that capital structure complexity has significant impacts on company performance, credit rationing and future debt covenants. We conclude the review by offering a simplified diagram that shows a summary of the determinants and impacts of capital structure complexity. We hope the simplified diagram could assist future studies on capital structure complexity in different institutional contexts.

Credit default swaps and debt specialization

We examine the effect of credit default swaps (CDSs) on debt specialization. We argue that reference firms in CDS contracts, seeking to minimize creditor conflicts and bankruptcy costs, exhibit higher debt concentration than firms on which no CDSs are traded. Our results show that firms engage in greater debt specialization and are more likely to specialize following the inception of CDS trading. Additionally, we find that, while lender concentration in firms increases, the number of bank lenders drops, lead arranger share rises, and the probability that lead arrangers and lenders are repeated increases following the onset of CDS trading. Our results are robust to instrumental variable estimation, propensity-score matching, different model specifications, and different subsamples.

A relação entre o nível de especialização da dívida e a restrição financeira de empresas brasileiras no decorrer do tempo

ABSTRACT This article sought to analyze the historical evolution, the composition, and the determinants of debt specialization of Brazilian firms traded on Brasil, Bolsa, Balcão (B3) from 2004 to 2019 in aggregate terms and in accordance with their financial constraints. This paper differs from the few studies on this topic carried out in Brazil and in other countries by promoting a discussion on the specialization of the debt structure in a context of financial constraints, as they are a relevant idiosyncrasy of emerging markets, such as in Brazil. The relevance of the study is to identify that debt specialization is a feature of only of financially constrained firms and not of the financially unconstrained ones. The impact of the study lies in a better understanding of why Brazilian firms are reducing their debt specialization, unlike other international evidences, such as the U.S. Descriptive statistics and regressions were estimated using the probit and tobit methods for 246 Brazilian firms between 2004 and 2019. The main result is that financial constrained firms are more likely to specialize their debt structure. Despite this propensity, these companies were the ones that most decreased their debt specialization between 2004 and 2019 (-27.77%), compared to the general sample (-27.5%) and unconstrained firms (-19.48%), revealing a behavior contrary to the U.S. scenario in which companies are increasingly specialists.

The relationship between the level of debt specialization and financial constraint of Brazilian firms over the time

RESUMO Este artigo buscou analisar a evolução histórica, a composição e os determinantes da especialização de dívida de empresas brasileiras negociadas na Brasil, Bolsa, Balcão (B3), de 2004 a 2019, em termos agregados e de acordo com suas restrições financeiras. Este artigo difere-se dos poucos estudos neste tópico desenvolvidos no Brasil e em outros países por promover uma discussão acerca da especialização da estrutura de dívida em um contexto de restrições financeiras, uma vez que são uma característica relevante de mercados emergentes, como o brasileiro. A relevância deste estudo está em identificar que a especialização da dívida é um atributo apenas de empresas com restrição financeira, e não de empresas sem essas restrições. O impacto deste estudo está no melhor entendimento do motivo de empresas brasileiras estarem reduzindo sua especialização de dívida, diferente de outras evidências internacionais, como as estadunidenses. Foram estimadas estatísticas descritivas e regressões usando o método de probit e de tobit para 246 empresas brasileiras entre 2004 e 2019. O resultado principal é de que empresas com restrições financeiras são mais propensas a especializar sua estrutura de dívida. Apesar dessa propensão, essas empresas foram as que mais diminuíram sua especialização de dívida entre 2004 e 2019 (-27,77%), comparado ao restante da amostra (27,5%) e a empresas sem restrições (-19,48%), revelando um comportamento contrário ao do cenário estadunidense, no qual as empresas são cada vez mais especializadas.

Climate Risks and Debt Specialization

Climate Risks and Debt Specialization

Debt Specialization and Credit Default Swaps

Debt Specialization and Credit Default Swaps

Debt Market Trends and Predictors of Specialization: An Analysis of Pakistani Corporate Sector

Recently, debt structure research has started focusing on the strategic perspective of financing choices, particularly to understand the reasons for debt specialization (DS). This paper examines trends of specialization over time and industry by using a comprehensive dataset on types of debt employed by the public limited companies during 2009–2018. The objective of the current study is to analyze the effect of debt market conditions by identifying significant predictors of DS. Time-series and cross-sectional results confirm the existence of DS, which is further validated by the findings of the cluster analysis. The empirical results indicate that overall, 61% of the companies solely rely on a single type of debt, mostly on short-term obligations accompanied by long-term secured and other debts. Moreover, small, mature, rated, group-affiliated, and low-leverage companies incline more towards this strategy. Credit rating, debt maturity, financial and interest coverage ratios serve as the primary determinants of the debt market that are significantly associated with the measures of DS. The results contribute to the capital structure literature by specifying that financing choice has an important implication in deciding the debt structure composition of the organizations.

Core Predictors of Debt Specialization: A New Insight to Optimal Capital Structure

Debt structure composition is an essential topic of discussion for the management of capital structure decisions. Researchers made extensive efforts to understand the criteria for selecting debts, specifically, to know about the reasons for debt specialization, concealed in identifying its predictors. This question is essential not only for establishing the field of debt structure but also for the financial managers to design corporate financial strategy in a way that leads to attaining an optimal debt structure. Sophisticated financial modeling is applied to identify the core predictors of debt specialization, influencing the strategic choices of optimal debt structure to address this issue. Data were collected from 419 non-financial companies listed at the Karachi Stock Exchange from 2009 to 2015. This study has validated debt specialization by showing that short-term debts maintain their position over the years and remain the most popular type of loan among Pakistani firms. Further, it provides a comprehensive view of the cross-sectional differences among the firms involved in debt specialization by applying a holistic approach. Results show that small, growing, dividend-paying companies, having high expense and risk ratios, followed the debt specialization strategy. This strategy enables firms to reduce their agency conflicts, transaction costs, information asymmetry, risk management and building up their good market reputation. Conclusively, we have identified the gross profit margin, long-term debt to asset ratio, firm size, age, asset tangibility, and long-term industry debt to asset ratio as reliable and core predictors of debt specialization for sustainable business growth.

Debt Financing of Small OTC Firms Reporting to the SEC

Although the concept of financial growth cycle proposed by Berger and Udell (1998) is intuitively appealing, empirical evidence has been scarce due to data limitations. In this study, we use a novel data set, small emerging firms trading on the OTC market and filing annual reports with the SEC, to provide empirical support for the financial growth-cycle paradigm. We find that as firms develop and gain track records, their debt usage increases and debt specialization decreases, suggesting a gradual easing of supply-side constraints. Further, positive sales and positive cash flows mark two milestones in debt financing: Positive sales broaden the firms’ access to various segments of the debt market, and positive cash flows deepen their relationships with banks. We also examine binary features of debt in our sample and find that convertible debt peaks when firms start generating sales, and firms increasingly rely on secured debt as they grow.

Debt specialization and performance of European firms

Abstract Relying on a cross-country comparable sample of European manufacturing firms, this paper investigates the relationship between the level of debt specialization (i.e. composition of the various types of debt) and firm turnover reduction in a time of crisis. The analysis is conducted applying the generalized propensity score matching methodology for continuous variables recently developed by Hirano and Imbens (2004) and Imai and Van Dyk (2004). This quasi-experimental setting allows estimating the (average) firm turnover reduction at each level of debt concentration (i.e. the dose–response function). Consistent with the theoretical analysis of De Fiore and Uhlig (2015) on the flexibility of the financial system, results from the empirical analysis suggest that firms having a diversified debt structure are less likely to experience a severe turnover reduction.

Managerial Entrenchment and Debt Specialization

Why do some firms borrow from multiple creditors and employ multiple debt types? This paper shows that entrenched managers exploit the coordination failure and free riding problem amongst multiple creditors. We find that firms with entrenched management have a higher proclivity to employ multiple debt types and have a dispersed debt structure. On the other hand, firms that are well-managed have a tendency to concentrate debt and borrow predominantly from a few creditors. We also find that while bank debt is negatively related to debt specialization, market debt is positively related to debt specialization. Overall, the findings suggest that creditors can discipline managers through debt specialization.

Reasons for Debt Specialization: Understanding the Perspectives of Small and Large Organizations

Debt specialization (DS) has become widespread among organizations in recent years. However, the reasons for its existence and prevalence have yet to be fully examined, especially among small and large firms. This paper aims to empirically determine whether both small and large companies pursue DS strategies for similar reasons. We use seven years’ panel data for 2009–15 for 419 nonfinancial companies in Pakistan, listed on the Pakistan Stock Exchange. The results of the comparative analysis confirm the existence of DS across organizations. Small firms follow DS to reduce expected bankruptcy costs, economize information asymmetries and decrease agency conflicts due to limited ingress to the debt market. Large companies include fewer types of debt to reduce operational risk and flotation costs and for building a good reputation. We suggest several theoretical justifications for these results, based on tradeoff and agency cost theory.

Reasons of Debt Specialization: Understanding the Perspectives of Small and Large Organizations

Debt specialization (DS) has become a wide spread phenomenon among organizations during the recent years, However, the reasons of DS among small and large organizations are yet to be fully known. This paper aims to empirically find whether small and large firms pursue DS strategy for similar reasons or for different one. By using 7 years’ panel data of 419 non-financial companies, the comparative results confirm the existence of DS across organizations. Small companies follow it to reduce expected bankruptcy cost, for economizing information asymmetry, decreasing agency conflicts and due to limited ingress to the debt market. While large companies include few types of debt to reduce operational risk, flotation cost and for building good reputation. We suggest several theoretical justifications for these results. The usage of short term debts is considerably important for all types of organizations irrespective of size.

Do group affiliated firms specialize in debt? Evidence from Pakistan

Purpose – The purpose of this paper is to examine the debt structure of group affiliated firms in Pakistan for the period of 2009-2011. The study seeks to know the level of debt specialization in group affiliated firms. If they do; then how are they different from stand-alone firms? Design/methodology/approach – The study primarily uses Herfindahl-Hirschman Index and Excl90 as measures of debt specialization, which are further used in cluster, threshold and conditional analysis. Corporate groups are characterized to subsidize their affiliates through internal debt market and loan guarantee. Logistic regression model is used to analyze association among the measures of debt specialization and firm-specific characteristics for group affiliated and stand-alone firms. Findings – The results show that about 85 percent firms use more than 50 percent of debt from one debt type. However, group affiliated firms are more inclined toward debt specialization than stand-alone firms. Tangibility and book leverage are negatively and significantly associated to the measures of debt specialization. Moreover, internal debt market and loan guarantee are suggestive reasons of debt specialization in group affiliated firms. Practical implications – This study highlights the issue of group affiliation and its significance on firm’s debt structure. It has implications for determination of the optimal financing strategy. In the context of emerging economies, group affiliated firms can create market imperfections as a protection shield. In case of emerging markets, it is recommended to strengthen regulatory mechanism to avoid such market imperfections. Originality/value – Prior studies have explored the phenomenon of debt specialization for rated and unrated firms. However, firm group affiliation is widely studied in the context of capital structure. This is a pioneer study to establish and analyze a link between firm group affiliation and debt specialization.

The evolution of debt policies: New evidence from business startups

Abstract We investigate the evolution of entrepreneurial firms’ debt policies over a period of 15 years after startup, considering leverage, debt specialization, debt maturity and debt granularity. Our analysis is based on a unique sample covering all non-financial Belgian firms founded between 1996 and 1998. We find that the debt policy of entrepreneurial firms is remarkably stable over time. The debt policy in the initial year of operation is a very important determinant of future debt policies, even after controlling for traditional contemporaneous determinants. The founder-CEO has an important impact on the stability of debt policies: the influence of initial debt policies on future debt policies is significantly reduced when the founder-CEO is replaced or when (s)he dies. Combined, our findings support imprinting theory.

Debt Specialization and Information Opaqueness

In this study, we suggest that level of information opaqueness determines the propensity of publicly listed firms to have debt financing from only a few debt types (i.e., debt specialization). Using accruals quality as a proxy for information opaqueness, we find that the degree of debt specialization is lower for firms with high-quality accruals. This result is consistent with the notion that information collection and monitoring costs are higher for firms that have higher informational opacity, explaining the tendency toward debt specialization. We further argue that the demand for monitoring by creditors is lower for firms with intensified institutional monitoring. The empirical findings show that firms with more concentrated institutional owners are more likely to be less specialized by debt type and that debt specialization is less sensitive to accruals quality in such firms. Using earnings timeliness and readability of annual reports as alternative proxies for information quality, we confirm the higher propensity to concentrate debt claims by type. We further examine how debt specialization changes following the arrival of bad news and find that the debt structure is more sensitive to accruals quality following the issuance of SEC letters regarding reporting deficiencies.

The Capital Structure of Private Firms

This paper investigates the capital structure of a large sample of U.S. private firms from 2004 to 2013. There is considerable heterogeneity in private firm capital structure, not only in terms of the level of leverage but also with regard to the issuance of specific debt instruments. Leverage, debt type usage, and debt specialization are dynamic and strongly related to observable firm characteristics largely in support of contract theory. Unobservable firm and industry characteristics are strong determinants of leverage levels and debt specialization. Macro credit conditions are not related to private firm leverage but are strong determinants of the degree to which firms diversify their debt capital structures.

Debt Specialization

ABSTRACTThis paper examines debt structure using a new and comprehensive database on types of debt employed by public U.S. firms. We find that 85% of the sample firms borrow predominantly with one type of debt, and the degree of debt specialization varies widely across different subsamples—large rated firms tend to diversify across multiple debt types, while small unrated firms specialize in fewer types. We suggest several explanations for why debt specialization takes place, and show that firms employing few types of debt have higher bankruptcy costs, are more opaque, and lack access to some segments of the debt markets.

Financial Liberalization and Corporate Finance Decisions

Financial reforms bring about major structural changes in the environment in which firms operate. These changes in institutional setting or framework should have profound effects on the structural and behavioral aspects of the firm. In this study we have evaluated the changes in capital structure, debt maturity and debt specialization and dividend policy at industry level for financial liberalization that took place in India beginning in 1988. We have used the theoretical framework such as the static trade off theory, the agency theory and the information asymmetry theory to predict the likely changes in the firm behavior because of financial liberalization. By using the financial liberalization database of Abiad et al., (2008) we are able to capture the gradual response of firms for a stepwise financial liberalization. We have also analyzed the mediating effects of size, growth opportunities and group ownership on these adjustment processes. Our results show that firms decreased their leverage and increased their dividend payout in response to financial liberalization with small firms showing significantly different response.

Debt Specialization

Debt Specialization