High Debt Levels Research Articles

COVID‐19 and the economic recovery in South Asia: Economywide modeling scenarios for Bangladesh and Nepal

AbstractWe use economywide models to examine the economic recovery from COVID‐19 shocks in Bangladesh and Nepal during 2020–2026. Declining labor productivity, capital underutilization, consumption shifts, and international investment shocks had significant and differential sectoral and country‐level impacts in these countries. By 2026, GDP will be 6.9% and 13.9% lower in Bangladesh and Nepal, respectively, and the two countries will have an additional 3.3 million people in poverty compared to a no‐COVID baseline. Regaining economic and welfare losses will require substantial investments in key industrial, agricultural, and tourism sectors, although tough policy decisions will be required given high levels of public debt.

Non-linearities in the relationship between public debt and inequality

ABSTRACT This paper examines the possible nonlinear relationship between public debt and income inequality. The literature extensively examines the non-linear growth effects of public debt, whereas its inequality effects are not investigated sufficiently. Public debt can be used to finance distributive policies, thereby improving income equality. However, high public debt levels can also harm economic growth and decrease the fiscal space due to sustainability concerns, high risk premia, and large debt service burden. Hence, it is possible that public debt can have non-linear effects on inequality. The empirical analysis documents that the relationship between public debt and inequality is positive with a declining marginal effect in the case of advanced countries. However, developing countries display a U-shape relationship, implying that public debt is initially associated with declines in inequality, while higher levels of debt are associated with higher levels of inequality. The analysis also shows that the determinants of inequality can differ greatly between advanced and developing countries.

Black/white differences in the relationship between debt and risk of heart attack across cohorts

BackgroundNumerous studies show that increasing levels of education, income, assets, and occupational status are linked to greater improvements in White adults' health than Black adults’. Research has yet to determine, however, whether there are racial differences in the relationship between health and debt and whether this relationship varies across cohorts. MethodsUsing data from the 1992–2018 Health and Retirement Study, we use survival analyses to examine the link between debt and heart attack risk among the Prewar Cohort, born 1931–1941, and Baby Boomers, born 1948–1959. ResultsHigher unsecured debt is associated with increased heart attack risk for Black adults, especially among Baby Boomers and during economic recessions. Higher mortgage debt is associated with lower risk of heart attack for White but not Black Baby Boomers. The relationship between debt and heart attack risk remains after controlling for health behaviors, depressive symptoms, and other economic resources that are concentrated among respondents with high levels of debt. ConclusionDebt is predictive of heart attack risk, but the direction and strength of the relationship varies by type of debt, debtors’ racial identity, and economic context.

The political affiliation of central bankers and government debt: Evidence from Africa

Using a newly constructed dataset, this paper investigates whether central bankers' characteristics which include educational and professional background and a new dimension: political affiliation, affect government debt for 31 African countries over the period 1984–2019. Our analysis relies on the assumption that when heads of state and central bankers share the same political ideology, this reduces preference divergences and gives politicians a means to exert influence over monetary policy, resulting in a high level of debt. Additionally, we argue that the extent to which political affiliation impacts government debt is conditional on the type of political regime. Our findings predict that government debt as a percentage of GDP goes up on average by more than 3 percentage points when the central banker shares the same political affiliation as the head of the executive branch and this result is driven by the democracies in our sample. Finally, our results show that the education of African central bankers has a statistically significant effect on government debt; in particular, we find that central bankers with a graduate degree are associated with a decrease in government debt relative to those with a bachelor's degree.

Do the Levels of Environmental Sustainability Disclosure and Indebtness Affect the Quality of Earnings?

Previous research has found that, when firms engage in environmental sustainability practices, they tend to give a consistent signal to external stakeholders by acting in a more responsible, transparent, and ethical manner, and these firms tend to exhibit high earnings quality. However, other studies have found that those activities may mask a poor earnings quality. On the other hand, firms with high debt levels face constraints in raising funds. In this study, we expect these firms, when involved in environmental reporting practices, to reveal an increase in their earnings quality in order to improve their ability to capture financing. Thus, we analyze whether the level of environmental disclosure and a firm’s debt increase earnings quality. To analyze the former association, we develop an environmental sustainability reporting index (ESReporting), based on GRI standards, using the content analysis for Portuguese firms from 2016 to 2020. We use earnings persistence as a proxy for earnings quality because it is a fundamental characteristic to determine firm value. Regarding debt, we include a financial indicator to analyze its effect on earnings persistence. To test the hypotheses, we estimate a multiple linear regression, applying panel data. Our results suggest that ESReporting and debt tend to positively affect earnings persistence. In addition, our evidence suggests that ESReporting produces a higher positive impact then debt. These results show that ESReporting and debt may be used as regulating mechanisms of earnings management. Besides, this article brings some insights to the improvement of earnings quality resulting from a higher commitment to environmental disclosure and contributing to monitoring managers’ activities.

A Comparative Analysis of External Debt in the East African Community Countries

Borrowing to finance public infrastructure has pushed debt levels to record highs within the East African Community (EAC) countries. Total external debt stock grew by 333.38 percent between 1970 and 2020. The rise in external debt exceeded growth in GDP and exports in all the countries except for the Democratic Republic of Congo between 2010 and 2020. The situation could have been worse had it not been for a massive external debt cancellation by the international community under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) programmes that benefitted all the EAC countries except Kenya. Virtually all the countries are increasingly borrowing more long-term than short-term external loans. Multilateral and official bilateral creditors continue to be the major financiers in all the countries even though these countries are gradually diversifying their sources of borrowing. All the EAC countries except Burundi had publicly guaranteed private sector external debt from commercial banks between 2010 and 2020. Three of the countries, Kenya, Tanzania and Rwanda, had nonguaranteed private sector external debt during the period. Two countries, Kenya and Rwanda, have joined a fast growing number of African countries that are issuing international sovereign bonds. The EAC countries are in a vulnerable position, with public external debt already at elevated levels. Trends in some of the external debt ratios including debt-to GDP, debt-to-exports, and debt service-to-exports ratios suggest that these countries could face challenges in servicing their external debts and meeting other foreign exchange obligations. High levels of external debt seem to have led to a vicious cycle of debt. Even after benefitting from the HIPC and MDRI debt relief programmes, the countries are once again facing high debt ratios. In light of the above findings, governments of the EAC countries should: look for improved terms on new loans; restructure external commercial loans that have heavy maturities and high interest rates; continue to diversify sources of external financing to reduce high dependency on expensive loans; make concerted efforts to increase concessional public external debt; explore non-debt creating financing options for public investments such as Public Private Partnerships; and look into refinancing expensive debt with debt on more favourable terms. Keywords : External debt, multilateral and bilateral debt, publicly guaranteed debt, external debt indicators, vicious cycle of debt DOI: 10.7176/JESD/14-4-01 Publication date: February 28 th 2023

Managerial market timing under credit risk: How do timed buybacks and stock issuances influence the value of long-term shareholders?

Using discounted cash flow valuation together with a Merton-style credit risk model this paper quantifies the effects of credit risk on timed equity buybacks and issuances. Assumed managers act in best interest of their long-term shareholders and do have superior information, the potential value gain for long-term shareholders out of market timing with and without credit risk is evaluated. As demonstrated in a real-world example, credit risk is important. Ignoring credit risk results in value gains of buybacks motivated by smaller (larger) mispricing levels being underestimated (overestimated), while value gains of issuances driven by lower (larger) mispricings are overestimated (underestimated). These effects are stronger for firms with higher debt levels.

Financial constraints and corporate greenwashing strategies in China

AbstractCorporate environmental responsibility, in response to the call for sustainable development, has become a critical ethical capital for companies to increase firm values and to obtain resources. However, this also gives rise to the concern of “greenwashing” that companies may selectively release environmental performance information to mislead the public and investors. Using the administrative environmental penalty data of all listed companies in China from 2017 to 2018, this research examines the corporate's greenwashing strategies. Our results show that greenwashing by listed companies in China is widespread, that only 13.6% environmental penalties have been disclosed by companies during our studied period. Companies choose to greenwash environmental performance mainly due to future demand for investment and financing, and companies with higher debt levels are found more likely to engage in greenwashing. Our findings suggest that it is not a rare practice for Chinese companies to risk their business ethics to pursue economic interests. It is necessary to enforce environmental information disclosure for listed companies in China and to increase their costs of unethical behaviors.

An overview fair play regulation in England premier league: Accounting information for leverage and financial distress to conservatism

The Union of European Football Associations (UEFA) has become an industry in recent decades that has attracted many investors. The UEFA issued a Financial Fair Play Regulation (FFPR) policy to control the financial condition of football clubs. This study aims to determine the effect of leverage and financial distress on applying the principle of conservatism to provide a sense of security to investors and creditors. It is quantitative research that uses purposive data from the football companies listed on the London Stock Exchange in 2011–2013. The results indicate that the level of leverage and financial distress positively affect the application of the conservatism principle. In conclusion, the higher level of debt and financial distress will increase the company’s applying the conservatism principle. A suggestion for further research is to test the theory against football leagues in other countries because football leagues in other countries may have different rules.

Sudden stops and optimal foreign exchange intervention

We model sudden stops in a small open economy as rare discrete events precipitated by increases in the world risk-free rate. When external debt is large, the model exhibits multiple equilibria, one where external debt and consumption remain high, and one with a collapse in external debt and consumption. Private agents delever following an increase in the world interest rate, but they fail to internalize the impact of deleveraging on the price of collateral. For high levels of external debt, even a small increase in the world interest rate can eliminate the high debt equilibrium and the economy experiences a sudden stop. The central bank can use foreign exchange intervention to prevent the sudden stop. If reserves cannot be borrowed, optimal policy is to “lean against the wind”, buying foreign reserves ex-ante when private borrowing is high and selling them after an interest rate shock when private agents are deleveraging.

Assessment of public debt sustainability in the Balkan market

This research paper focuses on the relationship between public debt and the economy in the Republic of North Macedonia. Debt size has become a crucial indicator for monitoring the health of economies, and North Macedonia’s economy is often reliant on borrowing. The COVID-19 crisis exacerbated the country’s already high level of debt, limiting budget response options. The effectiveness of implemented measures to mitigate the crisis depends on their adaptation to specific conditions. To assess the sustainability of public debt, the study uses ordinary least squares (OLS) and multivariate regression analysis, providing an empirical evaluation of North Macedonia’s public debt sustainability by using data from the Ministry of Finance. The main findings of the paper reveal insights into the sustainability of public debt and the impact of fiscal policies on economic stability. The study highlights the importance of careful debt management and the need for fiscal policies that strike a balance between supporting economic growth and maintaining budget sustainability. The empirical analysis and methodology employed in the study offer valuable insights for policymakers and researchers, aiding in the formulation of effective fiscal policies. Research has its limitations on the usage of the quartile data for earlier periods — transition periods that were not available.

Compassionate Off-Ramps: The Availability of Terminal Master's Degrees in US Medical Schools.

Medical students who underperform or find they are not a "good fit" for medicine have limited options. A terminal master's degree represents an exit alternative that recognizes students' completed coursework and acknowledges their commitment to the medical sciences. Although medical educators have called for the creation of such programs, termed "compassionate off-ramps," the prevalence of degree offerings in US programs is unknown. In the fall of 2020, a survey was sent to Student Affairs Deans at 141 LCME-accredited MD programs; 73 institutions responded (52%). Terminal master's degrees were offered by 19% of respondent institutions (n = 13). While 85% of those without a terminal master's (n = 48) endorsed degree benefits, only 36% (n = 21) had plans to create the degree. This study demonstrates that few US medical schools offer a terminal master's degree, leaving students who exit medicine with high levels of debt without an avenue for a degree to support employment or future academic pursuits. The authors identify implications for students, particularly those who are at a higher risk of failing Step 1, such as students who are underrepresented in medicine, socioeconomically disadvantaged, or who have a disability and are unaccommodated. Potential barriers to terminal master's program creation are identified and mitigating strategies are recommended.

Debt crises, fast and slow

With the Covid-19 pandemic, public debt around the world is rising to unprecedented heights in peacetime. We revisit the mechanisms by which, driven by self-fulfilling expectations, both slow-moving and rollover (fast) crises are pervasive at intermediate and high levels of debt, respectively. In both strategic-default and debt-limit models, belief-driven shifts in market assessment of risk translate into shifts of the market debt tolerance thresholds---to such an extent that sovereigns may lose market access even if they were able to borrow risk free in a good equilibrium. Long debt maturities may/may not shield countries from this adverse scenario. In a sunspot equilibrium, the threat of belief-driven crises may not be enough for the government to deleverage in a recession, and bring debt to default-free levels. Unless the initial debt is close enough to the critical threshold above which the country becomes vulnerable to such crises, the government will keep borrowing, gambling on economic recovery in the future.

Prepacks as a mechanism for resolving financial distress: The evidence

Prepacks as a mechanism for resolving financial distress: The evidence

Javni dug Republike Srbije u novom milenijumu - analiza stanja i tendencije kretanja u budućnosti

The subject of research in the paper is focused on the analysis of public debt in the Republic of Serbia in the time interval from 2000 to the end of 2022. Observing the data on the movement of public debt in the new millennium, it is noticeable that there is a trend of its increase after the world economic crisis of 2008. The main cause of such trends is the excessive consumption of state authorities and the reduction of tax revenues, which is a consequence, first of all, of reduced economic activity due to global negative tendencies in certain years. The high level of public debt represents the main barrier for the economic development of the Republic of Serbia. Analysis of the data in the observed period indicates that the problem of public debt growth can be solved by increasing the gross domestic product and reducing public spending.

Доходы и расходы российских региональных бюджетов: анализ причинности по Грэнджеру

This paper investigated the causality between expenditures and revenues of consolidated regional budgets of 83 subjects of the Russian Federation in the period from 2002 to 2019. Based on panel data, the Granger‐causality test was implemented with the calculation of critical values using the bootstrapping procedure for each individual region. The analysis is based on indicating the direction of the relationship between expenditures and revenues of regional budgets in the context of four hypotheses: “tax-spend”, “spend-tax”, “fiscal synchronization” and “fiscal disunity”. It has been shown that 25% of Russian regions fulfill the “tax-spend” hypothesis, 7% — “spend-tax” hypothesis, 47% — “fiscal synchronization” hypothesis, and 20% —“fiscal disunity” hypothesis. Regions in the “fiscal disunity” group are characterized by a high level of public debt, which for one‐third of them may create risks for their fiscal sustainability, and subsequently risks for the federal budget.

ФІСКАЛЬНА СТІЙКІСТЬ ЯК ЕЛЕМЕНТ НАЦІОНАЛЬНОЇ ЕКОНОМІЧНОЇ БЕЗПЕКИ В УМОВАХ ГЕОПОЛІТИЧНИХ РИЗИКІВ

Fiscal sustainability is crucial for the overall economic security of a country. It means the ability of the government to meet its financial obligations in the long run without relying on excessive borrowing and without resorting to inflationary policies. The purpose is to explore the key challenges to strengthening fiscal sustainability as an element of national economic security in the face of new geopolitical risks. Global economic crises, such as the 2008 financial crisis, the coronavirus pandemic, the war in Ukraine, crisis events in the banking sector in March 2023 can also affect fiscal sustainability. Economic crises can lead to a decline in demand for goods and services, lower tax revenues, and increased government spending on social programs such as unemployment benefits. This can lead to an increase in public debt and budget deficits. High levels of public debt also increase the risk that the government will default on its obligations, which could undermine investor confidence and increase borrowing costs. This can further exacerbate the problem of high public debt, as the government may have to devote even more resources to servicing this debt. According to the concept of "debt rejection" for developing countries, as a rule, there is a "lack of freedom" regarding the regulation of the debt level, although it is managed using the most modern methods. Identifying the determining factors for a specific country, highlighting the threshold of "rejection" of debt is a basic approach to debt management, in particular, its restructuring, determining an acceptable level of debt, using international lending to mitigate fiscal shocks and accelerate growth. To address the problem of high public debt, governments can implement measures such as spending cuts, raising revenues through taxation, or implementing structural reforms to improve economic growth. However, these measures can be difficult to implement as they may require difficult choices and sacrifices. Nevertheless, addressing high public debt is important for achieving fiscal sustainability and promoting national economic security.

Effects of Board Characteristics on Accruals Earnings Management in the Wake of Financial Crisis

This paper investigates the association between corporate governance and earnings management. More specifically, the effects of board characteristics on earnings management are examined. A proxy of earnings management, namely discretionary accruals (Modified Jones Model, 1995) is used to measure the level of earnings management. A sample of 103 firms listed on the Athens Stock Exchange during the period 2015-2019 was employed. Using panel data regressions, the authors explore the relationship between the discretionary accruals and five board characteristics as identified in the literature (independence, family directors, female directors, foreign directors, and CEO duality). The main findings of the study suggested that earnings management is restricted in firms with more independent directors and firms in which the same person takes the role of the CEO and the chairman of the board. Empirical results also indicate that in high performing firms earnings management is reduced while in firms with high levels of debt the opposite appears to be the case. The findings of the study have implications for many stakeholders such as regulators, managers, shareholders, etc. This paper contributes to the academic debate on earnings management by complementing the work of other researchers on the impact of corporate governance on earnings management in the wake of a financial crisis.

Determinants of Return-on-Equity (ROE) of Biogas Plants Operating in Poland

Poland has a large potential for biogas production from agricultural sources and food waste. This potential is still poorly used. There are many reasons for this state of affairs. We can indicate both the policy of the state towards renewable energy sources (RES) with a small amount of energy from biogas contracted at auctions, investment risk, and especially low return on investment in the absence of investment support. An important reason is also the limited state budget. The purpose of this work was to determine the endogenous factors that determine ROE, the direction of the impact of these factors, as well as the strategy of biogas plants in shaping the ROE level. The DuPont model was used in the analysis of ROE changes. We used the deviation method to determine the impact of the various factors on ROE. Against the background of the energy sector in Poland, the value of ROE in the examined biogas plants should be considered satisfactory, and in 2020 it was, on average, 13.9%. The decrease from 17.2% in 2019 occurred despite the increase in energy prices and the increase in the net profit margin (NPM). It resulted from the reduction of ROE’s financial leverage through external capital. A high level of debt characterized the examined biogas plants, and the pursuit of risk reduction and debt reduction negatively impacts on ROE. This may indicate the need for state investment support at the plant construction stage or low-interest investment loans to develop biogas plants. In addition, using only price guarantees under the feed-in tariffs, with dynamic changes in costs, may bring the industry a relatively high investment risk compared to other RES, where the operational costs during the lifetime are low, as it is in PV or wind systems.

Financial Resiliency of the Top Three Listed Companies in the Philippine Stock Exchange

The adverse effects of the ongoing pandemic caused big corporations to incur financial losses, which resulted in shrinkage of sales, increasing costs, and retrenchment. The entities' financial resilience was questioned, challenged, and business operations were paralyzed during the pandemic. Based on their market capitalization, this paper examined the top three listed companies in the Philippine Stock Exchange’s selected financial ratios if there were significant differences before and during the pandemic. Quantitative research using secondary data was used to quantify the mean and paired t-test based on the selected financial ratios. The results revealed that the current ratio, quick ratio, debt ratio, debt to equity, asset to equity, net profit margin, and return on assets had no significant effect on financial performance before and during the pandemic. Eventually, the return on equity showed a significant effect in the study. Therefore, presenting the findings, the study concluded that these companies were inefficient in generating profits and had a significantly high level of debt during the Covid-19 pandemic. Furthermore, a discussion about the benefits for the policymakers, potential and existing investors, and future researchers was also provided.