Long-term Debt Issues Research Articles

International portfolio rebalancing and fiscal policy spillovers

We theoretically and empirically evaluate the spillover effects of debt-financed fiscal policy interventions of the United States on other economies. We first consider a two-country dynamic stochastic general equilibrium model with international portfolio rebalancing effects arising from an imperfect substitutability between short- and long-term domestic and foreign bonds. We show that the model predicts fiscal multipliers for the US similar to those found in the literature. For international spillovers, the model shows that US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW). This is despite the standard trade channel's net positive effect on the ROW economy given the depreciation in the ROW currency. The fall in ROW output occurs mainly due to the increase in the ROW term premiums and long-term rates through the portfolio rebalancing channel, as the relative demand for ROW long-term bonds decreases following the increase in the supply of US long-term bonds accompanying the fiscal expansion. Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the trade and portfolio balance channels of fiscal spillovers and for the negative relationship between ROW output and US fiscal policy shocks.

Debt policy in Spanish America during the seventeenth century

This paper analyzes the policies that the Castile of the seventeenth century followed toward creating and selling short-term and long-term debt paid off from the Crown's New World revenues. We use microdata to reconstruct comprehensive fiscal accounts for Spanish America during the seventeenth century. Our new time series evidence shows that the Spanish Empire maintained differential debt policies in the center and the periphery. Spanish America issued considerably less debt, more credible than coetaneous Castilian debt. However, the issuances’ size did not reflect lower debt capacity in the New World, as the Spanish Empire restrained long-term debt issuance to emergencies. We also provide complementary evidence from debt issuances and explain why differential debt policies were maintained.

Discovering Future Earnings Patterns through FP-Growth and ECLAT Algorithms with Optimized Discretization

Future earnings indicate whether the trend of earnings is increasing or decreasing in the future of a business. It is beneficial to investors and users in the analysis and planning of investments. Consequently, this study aimed to identify future earnings patterns from financial statements on the Stock Exchange of Thailand. We proposed a novel approach based on FP-Growth and ECLAT algorithms with optimized discretization to identify associated future earnings patterns. The patterns are easy to use and interpret for the co-occurrence of associated future earnings patterns that differ from other studies that have only predicted earnings or analyzed the earnings factor from accounting descriptors. We found four strongly associated increases in earnings patterns and nine strongly associated decreases. Moreover, we also established ten accounting descriptors related to earnings: 1) %∆ in long-term debt, 2) %∆ in debt-to-equity ratio, 3) %∆ in depreciation/plant assets, 4) %∆ in operating income/total assets, 5) %∆ in working capital/total assets, 6) debt-to-equity ratio, 7) issuance of long-term debt as a percentage of total long-term debt, 8) long-term debt to equity, 9) repayment of long-term debt as a percentage of total long-term debt, and 10) return on closing equity. Doi: 10.28991ESJ-2022-06-06-07 Full Text: PDF

Managerial ability and debt maturity

We examine whether and how managerial ability affects corporate debt maturity decisions. The demand for shorter maturity debt is expected to be higher in firms operated by high-ability managers, who possess the superior skills needed to anticipate firms’ economic prospects and communicate their private information, thereby alleviating information asymmetry and bolstering their reputation. We document that firms with high ability managers are associated with more short-term debt financing. The effect becomes stronger for firms facing severe information asymmetry problems, unconstrained firms or high quality firms. Supportive evidence is found from the analysis of short- and long-term debt issuance activity. Our findings remain robust to alternative measures of managerial ability and debt maturity choice, and are not driven by omitted variable bias, endogeneity concerns or industry group. Overall, we provide robust evidence that supports the signalling theory for debt maturity structure and contributes to the literatures on managerial ability.

Impacts of Earnings Management and Institutional-financial Development on Capital Structure Choice in Latin-American Markets

ABSTRACT We analyzed the effects of accruals-based earnings management practices and institutional-financial qualities of countries on the financing policy of Latin American companies. We used panel data on a sample of 983 companies between 1995 and 2017. Our results indicate that positive discretionary accruals reduce leverage and increase debt maturity. These findings suggest that accounting manipulation activities favor managerial entrenchment and seek to avoid external supervision and liquidity risk. The institutional and financial development of countries promotes leverage and long-term debt issuances. However, its effects do not mitigate the impact of accounting manipulation activities on this policy. The IFRS adoption is an effective means of control that attenuates the effects of earnings management on capital structure. These results are relevant for investors and policymakers due to their implications for firms’ corporate governance and financial policy design.

Public Value Motivations for Debt Issuance in America’s Cities

Although contemporary public administration and management scholarship has given much attention to public values that inform public decisions, research on the public values that motivate debt issuance is scant. However, understanding the public values that motivate local governments’ debt issuance can contribute to excellence in public service delivery, impact governance, and enhance citizen participation in government as well as public managers’ overall behavior. The present article examines public values that motivate debt issuance by using case studies of seven large U.S. cities over a 4-year period (2016–2019). It employs an interpretivist rather than a positivist approach in the empirical investigations. The findings reveal that debt issuance in U.S. cities is motivated by a range of public values that reflect expected public outcomes related to community resilience, local productivity, and human development. Local public managers must consider contemporary public values when making critical decisions about long-term debt issuance, given the importance of such decisions for the sustainability of U.S. cities.

The evolution of European economic institutions during the COVID-19 crisis.

This article argues that the incomplete economic and institutional integration of the euro area has exposed the monetary union to increasing economic divergence, which could be deepened by the COVID‐19 crisis. We discuss how monetary and fiscal measures implemented at the onset of the pandemic have contributed to mitigate the economic consequences of lockdowns, but provided limited insurance to narrow economic gaps across member countries. However, EU countries agreed on July 21, 2020 to develop, for the first time, countercyclical fiscal transfers financed by common debt issuance. We discuss the potential of this instrument to contribute to improve the resilience of the eurozone.

Korean Firms’ Allocation of Cash Flow

This study investigates where Korean firms allocate cash flow. Our sample consists of listed firms in the KOPSI section of Korea Exchange over the period 2001-2016. Our estimation based on a system of equations shows that the largest use of Korean firms’ cash flow is repaying debt, followed by buttressing cash reserves and financing investment. On average, Korean firms allocate 38.5% of cash flow to repaying debt (specifically, 27.3% to paying off short-term debt and 11.2% long-term debt), 32.1% to buttressing cash reserves and 21.5% to financing investment. After dividing the sample into financially constrained and unconstrained firms (based on dividends, firm size or bond ratings), we find that financially constrained firms use more of cash flow in financing investment but less of it in reducing long-term debt (or total debt) than financially unconstrained firms do. As a result, the negative relation—that is, substitution—between cash flow and external finance (primarily long-term debt issuance) is less strong for financially constrained firms than it is for financially unconstrained firms. This finding is consistent with Almeida and Campello’s (2010) result from their U.S. study.

Real Effects of Financial Distress: The Role of Heterogeneity

What are the heterogeneous effects of financial shocks on firms' behavior? This paper evaluates and answers this question from both an empirical and a theoretical perspective. Using micro data from Portugal during the sovereign debt crisis, starting in 2010, we document that highly leveraged firms and firms that had a larger share of short-term debt on their balance sheets contracted more in the aftermath of a financial shock. We use a standard model to analyze the conditions under which leverage and debt maturity determine the sensitivity of firms' investment decisions to financial shocks. We show that the presence of long-term investment projects and frictions to the issuance of long-term debt are needed for the model to rationalize the empirical findings. We conclude that the differential responses of firms to a financial shock do not provide unambiguous information to identify these shocks. Rather, we argue that this information should be use to test for the relevance of important model assumptions.

Sovereign Debt Maturity Structure and Its Costs

I propose a theoretical model of a debt contract between a sovereign and its international lenders that determines the optimal debt maturity structure and related costs. It is shaped by two financial frictions: limited liability (the country cannot guarantee that it will not dilute its obligations or default on them) and market incompleteness (only non-contingent assets can be issued). I find that, in equilibrium, debt dilution constrains the amount of long-term debt issuance. I then focus on two aspects that are currently widely debated in both academic and policy fora: the possibility of sovereign debt restructuring with private creditors and international official lending in the event of exclusion from the international capital markets. The possibility of restructuring after default stimulates long-term debt issuance. However, in equilibrium, the proposed crisis management tools are unable to loosen the constraint on long-term debt issuance. Consistently with the empirical literature, I find that even when these policy options for crisis resolution are available, the country tends to issue mainly short-term debt.

Gap-Filling Government Debt Maturity Choice

Do governments strategically choose debt maturity to fill supply gaps across maturities? Building on a new panel data set of more than 9,000 individual Eurozone government debt issues between 1999 and 2015, I find that governments increase long-term debt issues following periods of low aggregate Eurozone long-term debt issuance, and vice versa. This gap-filling behaviour is more pronounced for (1) less financially constrained and (2) higher rated governments. Using the ECB’s three-year LTRO in 2011-2012 as an event study, I find that core governments filled the supply gap of longer maturity debt, which resulted from peripheral governments accommodating banks’ short-term debt demand for “carry trades”. This gap-filling implies that governments act as macro-liquidity providers across maturities, thereby adding significant risk absorption capacity to government bond markets.

Real Effects of Financial Distress: The Role of Heterogeneity

What are the heterogeneous effects of financial shocks on firms’ behavior? This paper evaluates and answers this question from both an empirical and a theoretical perspective. Using micro data from Portugal during the sovereign debt crisis, starting in 2010, we document that highly leveraged firms and firms that had a larger share of short-term debt on their balance sheets contracted more in the aftermath of a financial shock. We use a standard model to analyse the conditions under which leverage and debt maturity determine the sensitivity of firms’ investment decisions to financial shocks. We show that the presence of long-term investment projects and frictions to the issuance of long-term debt are needed for the model to rationalize the empirical findings. We conclude that the differential responses of firms to a financial shock do not provide unambiguous information to identify these shocks. Rather, we argue that this information should be used to test for the relevance of important model assumptions.

Dominion Gas Holdings, LLC—Anticipatory Interest Rate Hedging

The case examines interest rate risk management at a U.S. utility company, Dominion Gas Holdings. In November 2012, as part of its new financing plan, it wanted to hedge the interest rate risk involved with the company's 2013 planned issuance of $1 billion in debt. While the coupon rates for the planned debt were unknown as of November 2012, the company wanted to lock in its financing costs one year ahead since interest rates were at historically low levels. The company was considering entering into a number of forward-starting interest rate swaps. The use of forward-starting interest rate swaps as a pre-issuance hedging tool could cause some accounting and regulatory risks, and some other utility companies chose not to hedge at all. A bank had approached Dominion Gas with an indicative quote for the forward-starting swap, and the Treasurer had to decide whether it was a fair rate. This case has been used in a first-year MBA class that focused on valuation of financial markets, and a more advanced second-year elective that focused on derivative securities. Excerpt UVA-F-1754 Rev. Nov. 3, 2017 Dominion Gas Holdings, LLC: Anticipatory Interest Rate Hedging In November 2012, Dominion Resources, Inc. (DRI), one of the largest producers and transporters of energy in the United States, was planning the creation of a subsidiary that would consolidate the major components of Dominion's regulated gas businesses under one intermediate holding company entity. The timeline called for the formation of a new legal entity, Dominion Gas Holdings, LLC (Dominion Gas), around September 2013 by transferring several regulated gas subsidiaries from DRI to Dominion Gas. As part of its new financing plan, Dominion Gas planned to issue at least $ 1 billion in debt in November 2013. The offering would consist of senior notes, and the maturities would be a combination of 3-year, 10-year, and 30-year notes. While the coupon rates for the planned debt were unknown as of November 2012, the company wanted to lock in its financing costs ahead of time. Interest rates were at historically low levels (see Exhibit 1), and market commentators were predicting rising interest rates with the end of the U.S. Federal Reserve's monetary quantitative easing looming. The company was considering entering into a number of interest rate swaps to mitigate the interest rate risk associated with the anticipated long-term debt issuance. One particular set of swaps the company was considering was designed as a pre-issuance hedge for the portion of the 3-year debt offering that assumed a $ 250 million principal amount of such notes would be issued in November 2013. Dominion Gas Holdings, LLC . . .

The Drivers of European Bankss US Dollar Debt Issuance: Opportunistic Funding in Times of Crisis?

This paper provides a comprehensive investigation of the determinants of US dollar-denominated long-term debt issuance by European banks. The database used allows the drivers of foreign-currency issuance identified in the literature, including variables at the individual firm (e.g. bank) level, to be explored. The analysis covers overall US dollar issuance as well as Yankee debt issuance, which is defined in this paper as bonds denominated in US dollars issued in domestic US markets by non-US issuers. In addition, issuance determinants are investigated during both crisis and non-crisis periods. The main findings are the following. European banks issue US dollar debt to naturally hedge their US dollar assets (with US dollar exposures obtained from BIS international banking statistics), but they also make extensive use of deviations in covered interest parity and even in uncovered interest parity, particularly after the crisis. There is also evidence that banks issue in US dollars for strategic reasons and that heightened volatility has a negative impact on US dollar issuance. Bank-specific variables are also relevant drivers of US dollar debt issuance: banks with higher asset growth, with a banking subsidiary in the United States and with a high credit rating are more likely to issue in US dollars than others. Bank-specific structures, as captured by deposit and loan ratios, also have a relevant impact on US dollar funding activity in some cases. The results are robust to alternative econometric specifications and to different definitions of covered and uncovered cost savings.

The Determinants of Long-Term Debt Issuance by European Banks: Evidence of Two Crises

This paper is one of the first to investigate the determinants of bond issuance by European banks. We use a unique database of around 50,000 bonds issued by 63 banks from 14 European countries, allowing us to differentiate between different types of long-term debt securities. By investigating at the individual bank level, we are able to test explicitly a broad set of hypotheses from both the corporate finance and banking literature on the drivers of bond issuance. We use both country and bank-specific financial characteristics as explanatory variables. With respect to the country determinants, our findings suggest that "market timing" (low interest rates) drove issuance before but not during the crisis, when access to funding became more important than its cost. Moreover, during the crisis years, country-risk characteristics became drivers of bond issuance, while for banks from the euro area periphery central bank liquidity substituted for unsecured long-term debt. We also show that heightened financial market tensions were detrimental to bond issuance, and more strongly so during crisis episodes. Our results yield strongly significant coefficients for the bank-specific variables, with signs as expected. We find evidence of "leverage targeting" by issuing long-term debt during the crisis years. The positive and significant coefficient for the capital ratio supports the "risk absorption" hypothesis, suggesting that larger capital buffers enhanced the risk-bearing capacity of banks and allowed them to issue more debt. Moreover, banks with deposit supply constraints and relatively large loan portfolios issued more bonds, both before and since the crisis years. We also find that higher rated banks were more likely to issue bonds, also during the crisis period. Stronger banks issued especially unsecured debt, while weaker banks resorted more to issuance of covered bonds. Overall, our results suggest that stronger banks - including those from peripheral countries - maintained better access to longer-term funding markets, even during crisis periods. Our results pass several robustness tests. We present an additional aggregated country analysis in a separate appendix.

The role of effective corporate decisions in the creation of efficient portfolios

J. B. Guerard, Jr.H. MarkowitzG. XuChief executive officers and chief financial officers seek to implementcorporate financial decisions that maximize the stock price andstockholder wealth. Real assets may be tangible, such as machineryor factories, or intangible, such as technical expertise or patents.These real assets must be paid for. To finance the real assets, thefinancial manager makes decisions regarding the magnitude ofcommon stock issuance and stock repurchases, long-term debtissuance, and debt repurchases. Cash flows are generated by realassets, and the stockholders receive dividend payments based onthe net income generated by the corporation. Empirical evidenceshows that the dividend payment decision and stock and debtrepurchase decisions can increase stock prices and returns.A variable, denoted as corporate exportsVwhich incorporatesthe amount of dividends, net stock issuances, and net debtrepurchasesVis used as an expected return to create an initialefficient frontier. A stock selection model is used as a constraint inthe portfolio process in conjunction with the corporate exportsvariable to further increase returns. We use a data miningcorrections test for establishing the statistical significance of ourportfolio returns.Introduction

Optimal Maturity Structure of Sovereign Debt in Situation of Near Default

We study the relationship between default and the maturity structure of the debt portfolio of a Sovereign, under uncertainty. The Sovereign faces a trade-off between a future costly default and a high current fiscal effort. This results into a debt crisis in case a large initial issuance of long term debt is followed by a sequence of negative macro shocks. Prior uncertainty about future fundamentals is then a source of default through its effect on long term interest rates and the optimal debt issuance. Intuitively, the Sovereign chooses a portfolio implying a risk of default because this risk generates a correlation between the future value of long term debt and future fundamentals. Long term debt serves as a hedging instrument against the risk on fundamentals. When expected fundamentals are high, the Sovereign issues a large amount of long term debt, the expected default probability increases, and so does the long term interest rate.

Optimal Maturity Structure of Sovereign Debt in Situation of Near Default

We study the relationship between default and the maturity structure of the debt portfolio of a Sovereign, under uncertainty. The Sovereign faces a trade-off between a future costly default and a high current fiscal effort. This results into a debt crisis in case a large initial issuance of long term debt is followed by a sequence of negative macro shocks. Prior uncertainty about future fundamentals is then a source of default through its effect on long term interest rates and the optimal debt issuance. Intuitively, the Sovereign chooses a portfolio implying a risk of default because this risk generates a correlation between the future value of long term debt and future fundamentals. Long term debt serves as a hedging instrument against the risk on fundamentals. When expected fundamentals are high, the Sovereign issues a large amount of long term debt, the expected default probability increases, and so does the long term interest rate.

Creditor rights and capital structure: Evidence from international data

For a large sample of 48 countries, we find robust evidence that strong creditor rights are associated with low long-term leverage across countries. We further find that strong creditor protection lowers long-term debt issuance, the extent to which investments are financed with long-term debt, and target leverage ratios. Finally, we find that firm and country characteristics influence the link between creditor protection and long-term leverage. Our results support the demand-side view that strong creditor protection discourages firms from making long-term cash flow commitments to service debt because managers and shareholders avoid the risk of losing control in the case of financial distress.

Debt Maturity and Asymmetric Information: Evidence from Default Risk Changes

AbstractAsymmetric information models suggest that a borrower’s choice of debt maturity depends on its private information about its default probabilities, that is, borrowers with favorable information prefer short-term debt while those with unfavorable information prefer long-term debt. We test this implication by tracing the evolution of debt issuers’ default risk following debt issuances. We find that short-term debt issuance leads to a decline inborrowers’ asset volatility and an increase in their distance to default. The opposite is true for long-term debt issues. The results suggest that borrowers’ private information about their default risk is an important determinant of their debt maturity choices.