Bond Market Development Research Articles

Choice of Corporate Debt in China: The Role of State Ownership

We analyze the determinants of debt choices for Chinese firms between bonds and syndicated loans. This issue helps appraise the weak development of bond market in China. We test if flotation costs, asymmetries of information, and renegotiation and liquidation costs influence the choice of debt in line with former studies in the context of regulatory interference in the bond market. We check the role of central state ownership on debt choice in order to assess to what extent corporate debt choices are politically or economically driven. We test these hypotheses on a dataset of 220 listed Chinese firms over the period 2006–2010. We find evidence in favor of the influence of central government ownership on the financing choices of firms it owns, as central state-owned firms are more likely to issue bonds. We also observe limited support for the premise that this influence is stronger for central state-owned firms located closer to the capital. Furthermore, we identify that these companies tend to borrow uniquely on the bond market rather than tapping both debt markets. We provide evidence in favor of the flotation costs hypothesis, but provide mixed evidence for the information asymmetry hypothesis and rather reject the renegotiation and liquidation hypothesis. All in all, our findings show that financial factors play a much more minor role in corporate debt choices compared to other countries, whereas state ownership remain a key determinant of preferring the bond market.

Leverage and Returns in Three Countries of Southern European Region

1. Introduction This paper aims to shed light on the propositions put forward by Modigliani and Miller (1958, 1963) in their seminal work concerning the relationship between firm value and the financing decision. Debt is one of the principle sources of financial risk. Rational, risk-averse investors should demand a leverage premium, indicating an expected positive relationship between firm's leverage and stock returns. The vast majority of the studies in the area of capital structure investigate either the determinants of leverage or the existence of on optimal capital structure. Also, there are a few studies that examine the relationship between leverage and stock returns, with contradictory results, mainly in the USA and UK market oriented economies. The aim of the present paper is to provide additional empirical evidence in the relationship between leverage and stock returns, which up to know has attracted limited attention in the literature. In doing so, we treat leverage as an independent factor, in line with previous work (Hamada, 1969; Bhandari, 1988; Korteweg, 2004; Dimitrov and Jain, 2006; George and Hwang, 2010), and examine whether leverage is an asset pricing factor that can explain stock return variability. Furthermore, we perform our analysis both on a full sample basis and on an industry basis in order to investigate if the impact of leverage on stock returns varies as to the firm's industry classification, since, industry class is generally considered as an important risk factor. By using leverage as an independent factor the results of the present study can be converted to a practical tool, that is to say a successful investment (leverage) strategy. It is an aspect where limited work has been undertaken, and to the best of our knowledge it is the first to be undertaken in the Continental European, bank-oriented environment. The completely different politico-economical, legal, and institutional framework (the arm's length system of USA and UK vs. the control-based system of Continental Europe, Drobetz and Pensa 2007) the few previous studies have been carried out, justify the necessity of further exploration of the above relationship. Thus, the main objective of the present paper will be investigated with the use of a dataset from Greece and Italy, i.e. two countries from Continental Europe that has a bank oriented economy, contributing by this way the necessary accumulation of non-US and non-UK research. The importance of country specific characteristics on the capital structure theme has been emphasized in the literature (Rajan and Zingales, 1995; Psillaki and Daskalakis, 2009; Oztekin, 2009; Brounen et al., 2006; Andritzky, 2003; Alves and Ferreira, 2011). Specifically, Antoniou et al. (2008) examined firms operating in capital market oriented economies and bank oriented economies and concluded that the capital structure decision of a firm is not only the product of it's own characteristics, but also the result of the environment and traditions in which it operates. Jong et al. (2008,) give evidence that creditor right protection, bond market development and GDP growth rate have a significant influence on capital structure issues, highlighting the importance of country-specific factors in the corporate finance field. Moreover, literature on the corporate governance issues suggest that there may be strong differences in corporate objectives between the Anglo-American' and the Continental European Financial systems-the maximization of shareholders vs. the maximization of all stakeholders objective, Bancel and Mittoo (2004). Furthermore, the objective of the present paper will be tested in a different market environment as Greece and Italy have differentiating characteristics from other countries of the Eurozone. Specifically, the above mentioned countries, while members of the Euro zone, have a medium stock market compared to other European stock exchanges in terms of market capitalization, number of firms listed and turnover volume. …

Government Budget Deficits and the Development of the Bond Market in Pakistan: Issues and Challenges

This article examines how better discipline can be brought to fiscal policy, first, through enhanced institutional checks and balances, and second, through better market discipline. We examine the political institutions and budgetary processes that can affect fiscal policy in Pakistan. A sound fiscal policy feeds bond market development, while the bond market provides signals in relation to the prudent conduct of fiscal policy. A common dimension in this mutual relationship is the governance environment. The article concludes that instilling fiscal discipline will remain intractable unless approached comprehensively. Long-term solutions must be found in the development of political institutions and improved governance. An active and liquid bond market can play a crucial role in bringing about fiscal discipline. The real challenge lies in summoning the political will and raising public awareness to implement the required measures.

Development of the Bond Market and Perfect Enterprise Financing Structure

Development of enterprise bond market is to establish a multi-level capital market needs. Restricts the development of enterprise bond market is the root cause of the internal and external enterprise bond market institutional constraints. One is the current institutional constraints enterprise bond market development, second is the enterprise bond market by external institutional constraints of the development. To develop China’s enterprise bond market, on the one hand, to convert the corporate bond market administrative restriction system for legal constraints, market restraint system, at the same time, we should establish corresponding regulation of the financial system, financial supervision and financial innovation keep synchronization. On the other hand, will further reform bank credit system, and improve the state owned enterprise property rights system, and improve the corporate governance structure, perfect stock issuance and listing company distribution of the external institutional constraints. Key words: Enterprise Bond; Development; Countermeasures

Tapping Capital for Water

Urbanization, rapid economic growth and increasing populations in Asia pose great challenges on municipal governments to improve their water supply systems. The successful development of municipal bond markets could open new sources for investments into the water sector. There are three basic prerequisites for the successful sale of municipal debt, namely, the development of a modern and diversified financial sector, investor confidence and issuer familiarity, as well as a conducive regulatory environment. The article provides a detailed account of how these factors evolved in the nineteenth century United States and how they provided the basic tenets for the development of the world’s largest and most efficient municipal bond market. It concludes that the development of the municipal bond market was closely linked to the emergence and expansion of public water supply systems. Taking the US experience into consideration the article explores the potential demand for municipal bonds in China, Indonesia and India. The three countries face very different financial, economic and regulatory constraints, yet, all could gain from certain policy interventions geared towards the development of the municipal bond market.

Choice of Corporate Debt in China: The Role of State Ownership

We analyze the determinants of debt choices for Chinese firms between bonds and syndicated loans. This issue helps appraise the weak development of bond market in China. We test if flotation costs, asymmetries of information, and renegotiation and liquidation costs influence the choice of debt in line with former studies in the context of regulatory interference in the bond market. We check the role of central state ownership on debt choice in order to assess to what extent corporate debt choices are politically or economically driven. We test these hypotheses on a dataset of 220 listed Chinese firms over the period 2006 2010. We find evidence in favour of the influence of central government ownership on the financing choices of firms it owns, as central state-owned firms are more likely to issue bonds. We also observe limited support for the premise that this influence is stronger for central state-owned firms located closer to the capital. Furthermore, we identify that these companies tend to borrow uniquely on the bond market rather than tapping both debt markets. We provide evidence in favour of the flotation costs hypothesis, but provide mixed evidence for the information asymmetry hypothesis and rather reject the renegotiation and liquidation hypothesis. All in all, our findings show that financial factors play a much more minor role in corporate debt choices compared to other countries, whereas state ownership remain a key determinant of preferring the bond market.

ASEAN5 Bond Market Development: Where Does it Stand? Where is it Going?

ASEAN5 Bond Market Development: Where Does it Stand? Where is it Going?

Asean Bond Market Development: Where Does it Stand? Where is it Going?

Since the Asian crisis, ASEAN5 countries have expended considerable effort in trying to develop their domestic bond markets. Yet today these markets are not much larger, relative to GDP, than they were a decade before. How can we explain this? And does this mean that domestic markets have not, in fact, developed? The paper argues that bond market growth has been held back by a sharp fall in investment rates, which has left firms with little need for bond borrowing. Even so, markets have developed in other ways, to such an extent that substantial amounts of foreign portfolio investment have begun to flow into ASEAN5 bonds. These developments have important ramifications. With the investor base growing and infrastructure investment likely to rise, ASEAN5 bond markets could expand rapidly over the next decade, holding out the prospect that the region could finally achieve twin engine financial systems.

Is Japan Facing a Public Debt Crisis? Debt Financing and the Development of the JGB Market

This article explores the idiosyncratic institutional features of public debt financing in Japan that have enabled the government to finance increasing public debt at low costs. It examines the three key aspects that contributed to the Japanese government bond (JGB) market development: (1) the surplus financial balance of the household sector; (2) the strong tradition of public financing; and (3) home bias, that is, little dependence on external financing. It argues that Japan's financial institutions' capacity to absorb JGBs is reaching the limit and that the Japanese government needs to take bolder measures to reverse the flow of financial intermediation, from the public to the private sector. It also suggests that restoring people's trust in the government's competence and leadership is an essential element for successful fiscal consolidation.

What Effect Has Bond Market Development in Emerging Asia Had on the Issuance of Corporate Bonds?

This paper investigates the determinants of firms' decision to issue public debt in emerging Asian economies, using a novel database covering the period 1995 to 2007. We use comparable micro level panel of eight countries - China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand - to explore the influence of firms' characteristics and indicators of bond market depth on the decision to issue corporate bonds. Our paper demonstrates the influence of firm-specific characteristics on the decision to issue bonds, especially an indicator that the firm made previous issues of bonds. It also finds that the effect of market liquidity and local market size on the decision is small but significant. Finally our results show that co-ordinated policies by national governments to encourage bond market development have had little impact on probability of bond issuance at the firm level in Asia.

Examining the Relationship between Bond-Market Development and Risk Indicators that Portend Economic Downswings in Inflationary Markets

There is a general consensus that developing a viable and stable bond market in Zimbabwe deserves high priority in the financial sector development agenda. The envisaged bond market cannot be sustained in the current macroeconomic and political environment. The economic implications of the current economic and political environment have multiplier effects on both creation of an enabling regulatory framework and capital market development initiatives. The research, mainly done through a questionnaire survey intended to look at how money market rate volatility, in particular, affect the development of a viable and stable bond market. Other factors affecting the development of a bond market were also carefully examined as argued by different scholars and professionals in the literature review section. Survey carried out showed that the main factor contributing to the volatility of the short term interest rates was inflationary pressures in the economy as these increased the uncertainty of the direction of the long-term interest rates. Facts and opinions were used to come up with recommendations on what needs to be done if Zimbabwe is to have a viable and stable treasury bond market.

Urban Governance and Finance in India

Over 330 million people live in India’s cities; 35 cities have a population of over a million and three (Mumbai, Delhi and Kolkata) of the 10 largest metropolises in the world are in India. India’s cities are large, economically important, and growing. However, neither urban infrastructure nor the level of urban public services is adequate for current needs, let alone to meet growing demands. Dealing with this problem is a formidable challenge. Not only must adequate finance for the provision of services be found but it is critical to ensure that the money spent results in desired outputs and outcomes. To do so, local governance structures also need to be reformed and strengthened. This paper attempts to point the way towards some possible solutions by analyzing urban governance and finance in India in the context of lessons drawn from fiscal federalism theory and experiences of governance institutions and financing systems both in India and around the world. No one system of urban governance is likely to work equally well for all urban local bodies. However, the paper identifies some key reforms required to realize both the constitutional intent to encourage citizen participation in urban governance and the economic and politically desirable goal of ensuring greater accountability of urban governments. For example, the paper draws attention to existing ambiguities in the assignment system and underlines the need to undertake activity mapping to ensure clarity as well as to make independent agencies significantly accountable to elected governments in urban areas.The paper also discusses a variety of ways of augmenting the resources of the municipal bodies in the country including essential reforms in the property tax system and adequate exploitation of user charges and fees for various services delivered as well as ways of strengthening and improving central and state transfers to urban local governments. With respect to financing urban infrastructure, development charges should be used more effectively. More should also be done to utilize public lands more effectively. In addition, to a considerable extent capital expenditure requirements will have to be financed through borrowing so further development of the municipal bond market is important, as is more and more effective use of public private partnerships in some areas.

Local Bond Markets as a Cornerstone of Development Strategy

Debt markets represent the leading channel of liquidity for governments, public companies, agencies and financial institutions in many advanced and emerging economies. Developing a local currency fixed income market brings multiple benefits: stable access to capital, diversification of monetary policy instruments, creation of a yield curve for pricing financial assets and tailoring risk management tools.In most countries, the debt market is born out of the need to finance government expenditures. With time, the yield curve on public debt becomes a reference for private entities such as banks, public utilities and corporations, which are then able to tap the market to fund their investments.The development of local bond markets requires a strong commitment from governments to implement a proactive debt management programme as well as ensure a large and diversified issuers base. Therefore, a focused issuance programme of government securities is essential to establish benchmark bonds. Governments should also encourage publicly owned companies (especially utilities) to issue similarly structured securities to provide a slate of issuers that enjoy local name recognition, thereby paving the way for private corporations to issue debt. The GCC countries are investing heavily in infrastructure, which according to estimates requires USD2.2 trillion in financing. It is both opportune and desirable to raise this financing through securities backed by future cash flows from the infrastructure services, as is typical of project financing schemes.Although banks are the obvious buyers of bonds, since government debt is highly attractive for meeting statutory reserve or prudential requirements, authorities should encourage the development of a secondary market among life insurances, asset managers and international institutional investors. To ensure the success of the endeavour, the legal environment needs to be tailored to promote transparency, the seamless and timely flow of information, prevention of insider trading and minimal counterparty risk. As markets develop, issuances further down the credit spectrum will increase and more transparent accounting standards in accordance with International Financial Reporting Standards (IFRS) must be adopted. Another pre-requisite for the development of a healthy bond market is a flexible, interlinked, electronic registry clearing and settlement system.Building and sustaining a vibrant capital market relies on the commitment of long-term stakeholders. In addition to the government and the central bank, market makers, in their capacity as liquidity providers, are essential to ensure an active secondary market, particularly during a hiatus in primary market issuance. Finally, creating a robust framework for creditor rights and investor protection is necessary to instill investor confidence and maintain the momentum of capital market growth.

Development of Government Bond Market with Special Reference to Developing A Yield curve: Experience of Sri Lanka

Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.

Comparison of the Convertible Bond Market Development in China and Europe and the Enlightenment

As a financing tool with the characteristics of debt, stock, and option, convertible bonds have achieved a great development in Europe. China’s convertible bonds market faces a series of problems, including public issuing, policy support for traditional industries, absence of short mechanism, and convergence of product design. China must summarize experiences from European market, apply support policies, and build a convertible market with sustainable development by means of perfecting the credit grading system, releasing the market entrance restrictions, encouraging innovations in product design and issuing ways.

Financial Market Development and the Role of Foreign Bond Issuance: The Case of Australia

We examine the recent development of the foreign bond market - termed Kangaroo bonds - in Australia. Initially, a perspective is provided on the scale and scope of this market with particular attention paid to the characteristics of issuers. Overwhelmingly, this market is high credit quality and comprises sovereign, supranational, and major international financial institutions. Local institutional investors appear to have a preference for simple fixed-rate pricing structures; issuers then swap Australian dollar-denominated bond proceeds into the currency and coupon type of choice. There are two key features of this market which have facilitated its development: first, the highly liquid Australian foreign exchange and derivatives markets facilitate risk transformation; and second, enabling regulation has emphasized cooperation with market participants to maintain liquidity in benchmark issues and competitive pricing.

What Determines Bond Market Development in Sub-Saharan Africa?

This study empirically analyzes the determinants of bond market development in a cross section of 23 sub-Saharan African (SSA) countries between 1990 and 2008. It considers the stage of development and the size of the bond market, as well as the historical, structural, institutional and macroeconomic factors driving bond market development in SSA. The study finds that the savings constraint is a key impediment to domestic bond markets development as well as financial market deepening, as it results in a low level of financial intermediation by the banks. Overall, the results show that a confluence of factors matters for the development of domestic bond markets in SSA; these include structure of the economy, investment profile, law and order, size of the banking sector, the level of economic development, and various macroeconomic factors. Policy implications include increased efforts to strengthen the investment environment and the need for a regional approach to bond market development.

What Determines Bond Market Development in Sub-Saharan Africa?

This study empirically analyzes the determinants of bond market development in a cross section of 23 sub-Saharan African (SSA) countries between 1990 and 2008. It considers the stage of development and the size of the bond market, as well as the historical, structural, institutional and macroeconomic factors driving bond market development in SSA. The study finds that the savings constraint is a key impediment to domestic bond markets development as well as financial market deepening, as it results in a low level of financial intermediation by the banks. Overall, the results show that a confluence of factors matters for the development of domestic bond markets in SSA; these include structure of the economy, investment profile, law and order, size of the banking sector, the level of economic development, and various macroeconomic factors. Policy implications include increased efforts to strengthen the investment environment and the need for a regional approach to bond market development.

Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?

Using a large panel of firms across the world from 1991-2006, we show that the median foreign firm has lower idiosyncratic risk than a comparable U.S. firm. Country characteristics help explain variation in the level of idiosyncratic risk, but less so than firm characteristics. Idiosyncratic risk falls as government stability and respect for the rule of law improve. Idiosyncratic risk is positively related to stock market development but negatively related to bond market development. Surprisingly, we find that idiosyncratic risk is generally negatively related to corporate disclosure quality. Finally, idiosyncratic risk generally increases with shareholder protection. Though there is evidence that R 2 increases with creditor rights and falls with the quality of disclosure, these results are driven by the relations between these variables and systematic risk rather than by the impact of these variables on idiosyncratic risk.

Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?

Using a large panel of firms across the world from 1991-2006, we show that the median foreign firm has lower idiosyncratic risk than a comparable U.S. firm. Country characteristics help explain variation in the level of idiosyncratic risk, but less so than firm characteristics. Idiosyncratic risk falls as government stability and respect for the rule of law improve. Idiosyncratic risk is positively related to stock market development but negatively related to bond market development. Surprisingly, we find that idiosyncratic risk is generally negatively related to corporate disclosure quality. Finally, idiosyncratic risk generally increases with shareholder protection. Though there is evidence that R[superscript 2] increases with creditor rights and falls with the quality of disclosure, these results are driven by the relations between these variables and systematic risk rather than by the impact of these variables on idiosyncratic risk.